What’s The Best Way to Finance a Rehab?

Performance Property Real Estate Question

Q: Gerald, I found a good deal on a house that needs renovation.  What’s the best way to finance a rehab? Derrick, Sparta, NJ

A: Derrick, when you raise or borrow money, particularly on a rehab, the devil is in the details, so the best financing route will often depend on the terms. Generally speaking, you can try to raise money by taking on debt or you can partner and give away equity to raise money for the rehab. The best way to finance the rehab will depend on your financing agreement or your partnership agreement and the specifics of your real estate deal, for example, the amount of time you expect will be required to renovate and sell the property.

In some scenarios, borrowing money and taking on debt makes more sense. In others situations, bringing on an equity partner makes the most sense. As a general rule, giving away equity is safer because you don’t have interest payments looming over your head, but in many cases giving away equity may substantially reduce your profit. It really depends on the specifics of the deal. Most people assume they’ll be taking on debt to buy and rehab a property and therefore tend to focus on debt service terms like the interest rate and points charged, so it’s important to remember that equity financing is also a possibility.

There is no financing route that’s best in all cases, so, if you want to make an intelligent investment decision, THERE IS NO SUBSTITUTE FOR DUE DILIGENCE, you have to do your homework.

Thanks for your question, Derrick. Good luck.

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