Are you wondering how to afford rental property renovations?
Suppose you found an almost perfect rental property that you could make perfect with an additional $20 – $30K. The only problem is that you don’t have another 30K lying around. What can you do?
Consider this gem from Ken Kirkpatrick, of Wise Mortgage. It could save you thousands of dollars and cut back on the amount of time you’d spend finding ways to cough up an extra 20-30K in renovation costs.
Ken shared this brilliant yet unknown mortgage tip that includes home improvement funds – it’s called a purchase plus improvement mortgage.
This mortgage allows you to have that garage or deck built or develop the basement bedroom/suite as part of your mortgage funds.
Purchase plus improvement mortgage
How does it work?
Let’s say you buy the house for an agreed price of $ 380,000. You may get the mortgage approved for that purchase price plus an additional $ 20,000 in improvements, for a total of $ 400,000.
100% of the funds are advanced at closing to the lawyer, who holds funds in trust for you until the necessary rental property renovations are completed. Once inspected, the lender authorizes the advance. You will then make mortgage payments as if the full amount has been advanced.
For CMHC, it is the lesser of 10% of the purchase price of $60,000 (which is great for higher-priced houses).
By withdrawing money that was already paid into your home loan, the home improvement loan allows you to finance your renovation for the same terms as your home loan.
Have you ever received an offer for a zero percent interest credit card for a specific time, say eight or 12 months? If you only use it for rental property renovations and make monthly payments towards a goal of zero balance by the end of the offer, it’s a great way to borrow money on the cheap.
Line of credit
My Dad got an unsecured line of credit to use as bridge financing when his new home was being built. He was thrilled that he could write a cheque for 20K – just like that. Interest rates for lines of credit are typically lower than a regular credit card. Funds can be accessed as needed, and you only pay interest on the portion you use.
A home equity line of credit or HELOC is a loan/mortgage that works the same way as a regular line of credit. It allows you to use 80% of the equity in your home. For example, if your house has a market value of $300,000, you could borrow up to $220,000.
If the rental property requires major renovations, you may want to consider mortgage refinancing, which offers better interest rates than loans or credit cards. There are charges for set-up costs, and you must qualify, but repayment is spread out over a longer time frame.
As with all options, you will need to factor in your assets, home equity, future payments, and circumstances to choose the best option for you. It’s always a good idea to discuss your choices with a financial planner, mortgage broker, or accountant to determine which one is the most affordable alternative for your rental property renovations.
What’s the best method you use for affording rental property renovations? I’d love to hear about it Nelda@neldaschulte.com
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I am a property investor who is passionate about helping investors who self-manage to have profitable investment properties through resources and education. If you struggle with the wrong landlord forms, or worse yet, no landlord forms check out my 10 Essential Editable Landlord Forms that help you separate the good tenants from the bad and increase your property’s profitability.