Getting financing to rehab houses is harder now than before the crash, but can still be done. The preferred method to buying houses for rehab is cash or using an equity line of credit. This way if you are dealing with a motivated house you can close right away without the hassle of jumping through a lenders hoops. If this isn’t an option, you can find a private lender to fund your real estate deals. By offering friends, family, and anyone you know 8-10% interest you should be able to raise the money. You can set it up to defer payments to them until the rehab is complete and you sell the property. You will give them a first mortgage and personal promissory note in exchange for the money. This means they get the house if something goes wrong and can come after you personally.
Depending on the country and even the state in which you buy your property, a significant amount of your money may be spent on purchasing fees. In Germany, for example, you may pay up to an additional 20%-25% of your house purchase price in fees and other charges. Knowing how much it will cost to purchase your income property will help ensure its profitability.
The financial statements were just as easy to tackle. The first thing to do was the assumptions. To do that I simply took the selling price of my service (or product) and determined how much I would make in sales per day, week, month and year. That basic information was the basis for the remaining financial reports.
If you have 20 times your annual income requirement, it means that with the prescribed withdrawal rate of 5% yearly from your nest egg and the annual expected net return on your investments of 5%, you’ll never run out of money.
Make no mistake about it, the only reason why franchisees are about twice as successful as independent start-ups, is that they have a clear and proven Business Plan. Their plan contains all the elements that you must know before you begin your journey on the road to business ownership.
If you’re planning to get financed by a bank for rehab projects, you will likely need to contact at least ten in your area until you find ones, so don’t be discouraged at first. Don’t waste your time with big banks. Instead focus on the small community banks. If you plan to get financing for rehab projects and real estate investing in general, you will first need to assemble a loan package which lenders will request. It should consist of your last two years personal tax returns, personal financial statement (that shows all your assets & liabilities), a business plan, a cash flow examples (if you currently own property), & a brief description about yourself and the project you are applying for financing on as a real estate investment.
Analyze your property, the type of neighborhood in which it is located, and what businesses or organizations are nearby. Would this property be suited for young professionals with no families? Would this property be better suited for renovation and resell to a family? Knowing what you are buying will help you better turn a profit on your property.
Establish clear payment terms and expectations with your customers and have a formal receivable collection process in place. Consider discounts for prepayment or require a deposit for large purchases.