The real estate market is as competitive as it’s ever been, with many areas still undersupplied and interest rates keeping margins tight. As a result, many investors have shifted to a short-term strategy, flipping properties in high demand markets. Rather than using conventional mortgages, these projects demand specialized financing that’s designed for home flips. These loans are based on the After-Repair Value (ARV) of the property, which makes them easier to qualify for, and they also provide additional funds for renovations. However, not all ARV loans are created equal.
The structure of an ARV loan can have a big impact on financing costs, and that can easily cut into overall returns. As a lending professional, understanding the key differences in ARV loans can help you save your clients money and maximize ROI.
Most investors don’t realize all of the costs that come with a home flip, and how quickly they add up to reduce profit. Aside from renovation costs, there are also holding expenses like taxes, insurance, and utilities to consider. And when margins are already slim, borrowers need to make sure that their financing structure doesn’t end up costing them unnecessarily. Choosing a loan with a shorter timeline makes perfect sense for these types of projects, as it removes the prepayment penalty that comes with most financing programs. However, one of the key differences with RCN Capital’s ARV loan program is that interest only gets charged on outstanding funds, not the rehab holdback you haven’t used yet.
Typically with ARV financing, a borrower receives funds to cover both acquisition and renovation expenses. The problem is that many of these programs provide renovation funds as a lump sum, even if certain parts of the rehab process don’t get started right away. This means lenders charge interest on the full loan amount from day one, incurring unnecessary expenses that eat into profits. One the other hand, there are programs where only drawn funds incur interest. Renovation funds are disbursed in a series of payments called draws, with each dedicated to a different portion of the rehab work. Interest only gets charged on the funds once they have been disbursed, which helps borrowers save money and maximize returns.
This structure benefits fix and flip investors in a number of ways. First and foremost, they pay less in interest over the course of the loan when compared to lump-sum ARV programs. Crucially, it can also improve cash flow management for investors, allowing them to focus their available funds on where they’re needed. This helps projects get done faster and allows borrowers to deal with delays and unexpected costs more easily. It also means they spend less of their own money on each project, improving cash-on-cash returns and enabling them to perform multiple deals at once.
Let’s go over a real life example of how draw-based interest can save investors money. Say you are a real estate investor that’s looking to flip a home: it will cost you $200,000 to purchase it, $30,000 to renovate, and will have an ARV of $320,000. Also, the ARV loan you obtained has an interest rate of 10%. Over the course of the 6 months, you will pay $1,500 in loan interest on the renovation funds, on top of project holding costs and the interest on the acquisition funds.
Now let’s look at the numbers using a draw-based interest structure. Let’s say you receive a $10,000 disbursement after 2 months, another $10,000 4 months in, and the final $10,000 near the end of the project’s life cycle. In this scenario, you will have paid $333 in interest on the first amount, $167 on the second disbursement, and nearly nothing on the third. That totals out to $500 in interest paid, about $1,000 less than the lump-sum program, just from having the right loan structure.
Specialized ARV loans don’t just help investors save money, they also empower brokers to better serve fix and flip clients and capture more of their business. These programs can be a specific benefit that only you offer to maximize flipping ROI. When you meet with clients, take time to compare total project cost using different loan options, and highlight how draw-based ARV financing helps them save money. Offering these programs strengthens your authority as an expert in the fix and flip space, and when you combine the savings with great customer service and additional strategic guidance, it allows you deliver a standout experience to each client which helps you generate more business.
A successful deal takes more than just the right financing, however. As a lending partner, you can offer your expertise to help clients refine their strategies and ensure their deals turn out profitable. First, encourage clients to create detailed a rehab budget and stay involved in the renovation process to quickly deal with delays or unexpected costs. It’s crucial that these sorts of issues are handled right away, since the longer the project timeline becomes, the more the borrower pays in holding costs. Also highlight the importance of good communication for keeping a project moving forward smoothly. Staying on top of draw submissions makes sure that contractors get paid in a timely manner so work can keep progressing. And keeping a real estate agent in the loop means that the property can get listed and sold faster.
So what does the ideal ARV loan program look like? Most borrowers are only interested in securing the lowest rate, but lending professionals should make sure the loan includes these key features:
By offering reliable financing, you can provide a better experience for your clients, and that helps you build stronger relationships which lead to repeat and referral business.
If you want to provide your clients with a stellar lending experience, partner with a lender that has a proven track record in the real estate investing space. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors and lending partners. If you are looking to offer ARV based financing to your clients, RCN Capital has competitive loan options and an award-winning broker referral program available to partners.