Fix and Rent Loans: How Are They Different From Fix & Flip Loans?

You’ve heard of fix and flip loans, but have you considered the benefits of a fix and hold loan, commonly called fix and rent loans, strategy to build rental portfolios? The term recently coined for this strategy is BRRR which stands for “buy, rent, rehab, refinance, and repeat.”

What does this strategy entail as it relates to the loan process? We break down the basics to help give you a better understanding.

How Can You Use Fix and Rent Loans to Build a Rental Portfolio?

A short-term fix and flip loan is often thought of for properties that investors aim to renovate and sell for profit in a short amount of time.  However, that same short-term loan can also be used to help you buy and renovate properties to then refinance into long-term financing to hold the property for cash flow and future appreciation.  You can use this strategy when you’re investing in everything from single-family homes, townhomes, condos, multi-family units, and commercial properties.

For example, let’s say that you’re investing in a house that needs to be renovated before you can rent it out. In that case, a fix and rent loan might help you meet your goals by giving you the funding you need to make the necessary changes to the property. And, once the renovations are complete, you’ll be ready to start profiting from your investment because it will be a desirable spot for tenants in search of a modern place to live.

A fix and hold loan can also come in handy when you need money to renovate a space in order to repurpose it. For example, if you’re investing in a commercial property and you need to convert it into an attractive and functional office space, this loan can give you the financial support you need to make those big changes before putting the property up for rent.

Traditional Mortgage vs. Fix and Rent Loans

More and more real estate investors are turning to fix and hold loans when they want to build a rental portfolio but they don’t want to have so much of their own cash tied up in the property.

But, why wouldn’t real estate investors just get a traditional mortgage? Well, when it comes to investment properties that aren’t owner-occupied, a conventional lender will typically want 20-25% down. Plus, the property typically needs to be in a rentable condition to begin with and conventional long-term mortgages don’t provide funds to the investor to repair the property.  Not to mention that conventional loans can take weeks to close. Whereas, closings of less than 7 days are often needed to be able to compete against cash offers on properties that are being sold below market due to their condition.

On the other hand, when you qualify for a fix and hold loan, you’re basically getting a fix and flip loan that you’ll later convert to traditional financing. In this scenario, you might only be required to put 10% down (half or less than half of the down payment on a conventional loan), while also getting the vast majority of your repairs funded too.  Plus, fix-and-hold loans from hard or private money lenders can often close in a week or less.

Bottom line: with a hard money loan like a flip and hold loan, real estate investors get the support and flexibility they need, allowing them to keep more cash on hand to purchase other properties and have the cash available for the for repairs and renovations.

What to Expect with a Fix and Hold Loan

A fix and hold loan actually starts off as a fix and flip loan. This gives you the money you need to renovate your investment property. Then, once you’ve finished making the necessary repairs, it becomes a fix and hold loan when you can refinance.

Then, when you refinance the short-term, fix-and-hold loan into long-term lower-rate financing, the conventional lender will look at the new, fixed-up appraised value of the property. Generally, these types of refinances are completed at 75% loan to the new appraised value of the property after it has been fixed up via the fix-and-hold loan.

You will want to ask the refinancing long-term lender if they have any “seasoning” requirements. Meaning, does the refinancing lender requires that you own the property for a certain amount of time before they will consider the refinance and use the new, fixed-up appraised value of the property.

In the end, you’ll end up getting longer-term financing that can help you use your property as a rental.

At Merchants Mortgage, we can guide you through your options when you’re ready to invest in real estate that you plan on renovating, holding, and renting out. With our fix and hold loans, you can get the money you need quickly so you don’t have to delay when you find an investment property worth jumping on.  So, just remember BRRRR… Buy, Rehab, Rent, Refinance, and Repeat!

Are you ready to learn more about these loan products? Contact us today to speak with a qualified lender who can answer all of your questions and tell you all about the application process.

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