Funding your renovation is a critical piece of the puzzle in renovating for profit. You may be more comfortable using the conventional ways of raising funds, such as borrowing from the bank, but there are other avenues for raising funds if you are willing to think outside the box.
We can only give general information with regard to finance and buying and renovating property. Your responsibility is to get advice from your personal finance experts before taking any action based on what we share with you in this article.
Renovating for profit can be life-changing, and your chance of success increases if you ensure that your financia and legal l structures are set up before you start looking at properties. Imagine finding the perfect property and not being able to move on it.
I can guarantee you that if you go out looking for a property, you will find the perfect one on day one if your money’s not ready.”
~ Bernadette Janson
We have identified six possible ways of financing your renovation projects, from the traditional tried and tested investment loans to joint ventures and investment partners. Sometimes you need to be creative to make your dreams a reality.
Borrowing Money From The Bank
Securing an investment loan from the bank is the traditional model for financing your property investments. We have used an additional facility to cover deposits, buying, and holding costs.
All your costs must be factored in to know how much you need to borrow, which can begin at 30% of the property’s value. The scope of your project and the length of time you plan to hold it must also be included in your feasibility study.
You will also need to secure an investment loan, which is usually the equivalent of 80% of the property’s value. However, if you struggle to get the money together, you might opt for a 90% loan-to-value ratio (LVR). Bear in mind that it has implications for your lender’s mortgage insurance.
Having a facility for access to cash combined with an investment loan is the typical financial strategy many renovators use. It is critical to have your loans in place before you start looking for a property, especially if you are planning to make a living from renovating and quitting your day job.
It pays to build up a history before trying to secure a loan without the backing of a regular paycheck. By the time you are ready to start cutting back on your hours and move into renovating full-time, you must know how you are going to maintain those facilities when you stop working.
Joint Venture Partners
Another model you are familiar with, especially if you regularly listen to our podcast, is joint ventures. You can enter a joint venture with one partner or many to help share the workload and the financial burden.
Last year, I did a project where I had 14 partners. One provides the investment loan, one provides the cash, and you work out who’s going to do the project between you, and off you go.”
~ Bernadette Janson
It’s crucial to set up your joint venture properly. Bernadette compares joint ventures to marriage. Once the fun honeymoon phase is over, things begin to get on your nerves, and there will be times in your partnership when you don’t like each other very much.
Therefore a formal agreement and a legal structure must be in place before the project gets off the ground. You must plan for every eventuality, and if you do have a conflict, you must work through it together instead of throwing in the towel or going the legal route to sort it out.
When you have a joint venture process that works well, the sky is the limit. It enables you to do projects with two or more people, giving you much more leverage.
Having a financial partner is like doing a joint venture, except your partner is not involved in the project. They simply help you finance it.
Many people want to invest their money somewhere where they can earn more than the interest rates they get from the bank but don’t have time to do the projects. We don’t recommend this model if you are new to renovating for profit. However, it can be a very powerful strategy.
One of our Wonder Women made a list of all the people she knows who she thought might be money partners for her projects. She rang them all up and found a reliable joint venture partner who had the capacity to fund her projects, which have been bigger and better than she would have been able to do on her own.
Like joint ventures, you must consult with an accountant and a property lawyer to set up the legal framework of your partnership to protect your interests and those of your financial partner.
Vendor finance may become more popular now due to the property market slowing down. However, it is a poor strategy when the market is buoyant. How it works is the vendor leaves some of the money in the property, and you structure a payment plan with them instead of getting finance from the bank.
When someone lists a property to sell, they want to get it sold and move on, so vendor finance is not a preferable strategy for them. It can work when the market is cooler, and it’s more challenging to sell their property.
Again, to protect the interests of both parties, you must consult with a lawyer and draw up an agreement that includes the time frame for paying the balance and when your name is added to the title deed.
I have a friend who’s done a few of these projects. He buys properties that are suitable for Airbnb on vendor finance and then builds up the earning capacity of the properties to be able to get finance on it so that he can own it in his own right.”
~ Bernadette Janson
Purchase A Property With Options
A property option is another out-of-the-box finance strategy, and you must consult with a lawyer to help you navigate its conditions. It’s a way of securing an investment property without having to pay a large lump sum up front.
For example, If you are interested in a property and wish to develop it, you can enter into an agreement with the landowner for a minimal upfront fee, with the option to purchase the property at a later date.
The terms of the agreement include a date by which you have to exercise your option or withdraw from the purchase. To secure the property, you must pay the purchase price and stamp duties by this date.
The benefits of a property option include:
- Affords you time to get development approval from your local council.
- This prevents the seller from selling the property to someone else.
- Minimum upfront commitment, for example, the option can be secured for as little as $1000.
- Avoid stamp duty if you can complete your development and resell the property before the option expires.
One of our renovators found a splitter block the vendor was battling to sell because the house needed to be demolished. She bought the property on option, paid to have the house demolished, and split the titles.
Although she didn’t manage to sell both properties before the option expired and had to pay stamp duties, she did manage to sell them and pocket the difference between what she owed the vendor and her selling price.
There are three ways to secure the funds you need to renovate a property you already own and don’t have enough money to complete your project, including:
- You can secure a personal loan from your bank, usually for a small amount of about $10,000.
- If you have a credit card with a significant limit, you could fund your renovation on your credit card.
- Some funding sources will lend you money to finish a project, but they can be quite expensive because they work on lumpsum payments instead of interest.
Bonus Tip: Private Investors
Private investors and borrowing organisations will lend you money privately for interest rates between 8% and 20%. So, it’s not the best way to fund your renovation, but if you find yourself stuck between a rock and a hard place, it can help you complete your project.
If you set yourself up correctly from the beginning of your property renovating journey, the ability for it to positively change your life is exponential. It boils down to taking the right steps and choosing the best strategies to achieve your goals.
Flipping is exciting and serves a purpose at the beginning of your renovating for-profit business. However, stepping up your strategy will enable you to build passive income and wealth.
The theme for this year’s She Renovates Live event is “Million Dollar Renovator”. It doesn’t necessarily mean you are working on multimillion-dollar projects. Sometimes the projects are quite modest, but they have exponential returns.
That’s what we will be bringing to you in She renovates Live: projects that are happening in our community with quite modest buying prices, but most of them have the capacity to set these women up for life. So if you would like to be part of that, we would love to see you there.”
~ Bernadette Janson