When to Use a Rehab Loan

Rehab loans are designed to provide funding for real estate investors who want to purchase and renovate properties.

Rehab or renovation loans are particularly useful for fix-and-flip projects, where the goal is to purchase a distressed property, renovate it, and sell it for a profit.

Let’s take a look at what a rehab loan is, how it works, and when to use a rehab loan for your particular investment goals.

What is a rehab loan?

A rehab loan combines the financing for a property purchase and renovations into a single loan. 

This structure is helpful for investors who may not have the upfront capital to cover both aspects separately.

Rehab loans are short-term loans that often range from six to 18 months. This shorter timeframe aligns with the quick turnaround of fix-and-flip investment projects.

In the world of real estate investing, rehab loans are often financed by hard money lenders and referred to as fix-and-flip loans.

Rehab loans from a traditional lender come with strict underwriting requirements, but a hard money lender with in-house capital has greater flexibility.

Hard money lenders can approve your loan based on the property’s after-repair value (ARV), rather than the investor’s financial situation and tax returns.

How does a rehab loan work?

1. Investor finds a distressed or outdated property with the potential for improvement
2. Investor applies with a lender who specializes in fix-and-flip financing
3. Lender assesses the property’s current condition and value, your proposed renovation plans, and the potential ARV to determine the loan amount and project feasibility
4. Lender specifies terms and conditions, including loan amount, interest rate, and draw/repayment schedule
5. Investor purchases the property with the fix-and-flip loan and begins renovations
6. Investor draws funds on a reimbursement basis based on the rehab budget and work completed on the property
7. Investor sells the rehabbed property for a profit and repays the loan

Most fix-and-flip lenders can close on your loan in a matter of days. Park Place Finance has the technology and experience to close fix-and-flip loans in three to five business days.

Due to the nature of these types of investments, fix-and-flip projects require speed and flexibility to secure the next deal.

Hard money lenders understand the nature of these deals and can help investors access the financing they need much faster than traditional lenders.

When do real estate investors use rehab loans?

Real estate investors primarily use rehab loans for fix-and-flip or fix-and-hold projects.

Unlike a fix-and-flip, fix-and-hold properties are purchased, renovated, and held long-term as a rental property.

The following are some common rehab loan scenarios.

Distressed properties

Investors use rehab loans to purchase distressed properties at a lower price and make significant improvements, including structural repairs, plumbing and electrical upgrades, or kitchen and bathroom renovations.

Outdated properties

Sometimes the property doesn’t require significant repairs but needs to be updated or modernized.

This strategy allows investors to enhance the property’s value and appeal to potential buyers or tenants.

Cash offers

In competitive real estate markets where desirable properties have multiple offers, investors may use rehab loans to make a cash offer.

A cash offer provides a competitive advantage and increases the likelihood of securing the property.

Higher market value

Investors use rehab loans to unlock hidden value in properties by addressing structural issues, improving energy efficiency, or enhancing curb appeal. 

This can result in a higher property appraisal and increased marketability.

What is the best type of rehab loan for investors?

A hard money fix-and-flip loan often is the most helpful type of rehab loan for investors due to the speed and flexibility of hard money.

The benefits of a hard money fix-and-flip loan include:

• Quick, streamlined approval process and funding
• Asset-based lending that doesn’t rely solely on the borrower’s finances
• Flexibility with property types
• Short-term financing that aligns with the timeline of a fix-and-flip project
• Covers both the purchase price and costs of renovating
• Ability to finance distressed properties that may not be eligible for traditional financing
• Competitive advantage in bidding wars
• Hard money lenders have a deep understanding of the fix-and-flip market and specialize in real estate investments

Of course, the best type of rehab loan for an individual investor depends on their specific goals, needs, and project timeline.

Your Park Place Finance account executive will help you navigate the financing options available to you and offer support and guidance throughout the loan process—and beyond.

How to qualify for a rehab loan

To qualify for a rehab loan, investors must meet certain lender requirements.

For fix-and-flip loans, this includes:

• Minimum credit score of 640
• Loan-to-cost (LTC) up to 90%
• Loan-to-purchase (LTP) up to 95%
• ARV up to 75%
• Loan amounts $100,000 to $3,000,000
• Single-family homes, duplexes, triplexes, quadplexes, multi-family units, condos, and townhomes

Park Place Finance does not require tax returns, income verification, or your debt ratio, but we do require the following documentation:

• Purchase contract
• Rehab budget
• The last two bank statements
• Property insurance
• Driver’s license
• LLC/entity docs (if an LLC)

Eligible loan types include purchase and rehab, refinance and rehab, buy and flip, or buy and hold.

What if my rehab project is finished earlier than expected, or takes longer than expected?

Park Place Finance has no prepayment penalty, so you can pay off the loan at any time without incurring additional fees. 

Your interest is calculated by the days you hold the loan before the payoff.

If you find that your project isn’t going to be completed on time, contact your lender immediately. 

Investors may be able to get an extension depending on their project status, history of on-time payments, and other factors.

Apply for a rehab loan today with Park Place Finance

Park Place Finance is a direct hard money lender with in-house capital.

We lend nationwide and currently have over $1 billion in loans funded across 17 years of business.

We welcome fix-and-flip investors with all levels of experience, whether you have flipped hundreds of properties or this is your first one.

We’re here to help you with any questions you may have about the rehab process, including budget reviews, property valuations, and profitability analysis.

Many of our expert flippers started their first flip financing with us!

Get started with Park Place Finance by supplying us with some basic information about your loan scenario, or give us a call at (866) 407-1599 to speak with a dedicated account executive now.