Buying your first investment property can be a daunting task. When you’ve decided to purchase a second (or more) to fix and flip, another layer of complexity is added that can strain even a savvy investor.
Making your second investment purchase possible requires an understanding of your own financial and credit situation, as well as learning how one fixer-upper can help with securing your next property. Investors need to examine what types of funding sources will be used to acquire and renovate.
To help investors looking at that next project, here is a rundown regarding the main financing options available.
Acquisition loans are not used to renovate or make repairs on a property. Instead, these loans provide funding to investors who are looking to buy an investment property such as a single-family house that the purchaser will use to generate annual income, for example, by renting to tenants. This financing is also appropriate for purchasing townhomes, multi-family units, commercial properties, and vacant land that is ready for a construction project.
Fix & Flip
This hard-money short-term lending option has a quick award time if approved from the financing company issuing the loan. Fix and Flip loans are generally used to purchase and renovate the desired investment property to sell for a profit.
This funding source helps investors who are between two real estate transactions. The real estate investor uses a "bridge" or "gap" loan, before selling a flip, to purchase a second investment property.
Cash Out Refinancing
Fix-and-flippers wanting to use built-up equity from an active rehab project to acquire a second property can apply for cash out refinancing. The loan is based on the difference between the balance on the current loan and the amount of the new loan. The investor can use the cash for other investments or projects, including an owner-occupied home.
Refinancing lowers the interest rate on an applicable loan. Property investors can use this option to create more useable cash and time for their fixer-upper project. Securing investment refinancing can take as little as a couple of days, but qualifications ultimately depend on the lender holding the loan.
Ground Up Construction
Investors looking to take on more ambitious projects may want to consider ground-up or new construction loans. The borrower uses this financing for vacant lots that are ready for new construction. Investors can also use the loan to acquire the lot they intend to use to build the new home.
There are many financing options available to real estate investors, so be sure to do your research. Even if you applied for financing on your first investment, you may find lenders have better terms after you have finished your first project and have proven success. Working with a trustworthy financing partner can help you identify what options works best for your particular situation.