requesting the right loan. If you apply for a purchase-money loan when there is a renovation component, you will end up getting lower loan proceeds. This will require you to invest more cash into the project. One reason this happens is because the loan will be based on the existing value of the home that needs improvement or is in disrepair. Keep in mind, purchase-money only financing will require you to pay for all the renovations out of pocket, and you won’t get reimbursed until the property sells. You have another option, though. If your project has a significant amount of renovation associated with it, we recommend taking advantage of financing the rehab portion as well since lenders will provide more proceeds. With this type of loan, you’re typically allowed to use the after-repair-value (ARV). Because you will explicitly outline the renovation plan, this enables you to get higher leverage and have money set aside throughout the deal. Lenders are also willing to provide higher leverage on the initial purchase, mainly because they know you are planning to increase the property’s value. When you seek funding from the lender, make sure you convey how the renovations will be executed and how they will add value. Second, to ensure you have enough capital for the project, add a cost contingency of 5-10 percent in your scope of work for the unexpected. Additionally, always account for overages. If a contractor
gives a quote between $4,000
and $6,000 to fix a kitchen, use $6,000 so that you are not left paying out of pocket. Adding cost contingencies should be fine, as long as the deal stays within the lender-approved
you to build a renovation strategy that delivers the best possible ROI. After all, renovating a home involves much more than aesthetics (though important). Execute every step with precision. That means identifying the proper budget and renovations, partnering with reliable contractors and designers, and having the right loan and lender. If you diligently manage all aspects of the project, and stay disciplined, you will transform the home into a highly desirable, highly profitable investment opportunity and achieve your goals for the deal. And along the way, you will have gained valuable experience, which will enable you to make the next project an even greater success. •
loan-to-value or loan-to-after- repair-value ratio (LTV or LTARV). Crunch the numbers and make sure your LTV ratio works, and you will be able to finance most of your additional contingency budget. As you renovate the property, utilize your renovation holdback to your advantage. It can help maintain cashflow. Renovation projects can become unpredictable, as everything from labor to weather issues can impact your budget and timeline. Other variables like construction material costs, which increased by nearly 5 percent in 2019, can affect the budget. So, preparing for the worst and planning conservatively is advisable. WINNING THE DEALWITH GREAT DESIGN, EXECUTION, AND FINANCING With value-add real estate investment projects, you must take a 360-degree perspective and consider all aspects of the process (upgrades, operations, and budgeting). Accounting for each of these allows
Nathan (Nate) Trunfio is a real estate lending and investing expert, with a career that has spanned the entire real estate financing spectrum. He is the
President of DLP Direct Lending Partners, a national private lender, and has developed a multimedia platform, Talking Loudly with Nate, which leverages his expert position to provide other investors insight into all aspects of real estate investing.
58 | think realty magazine :: july 2020
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