The Two Best Ways to Finance Rental Renovations
Most rental property renovations get financed one of two ways: cash-out refinancing on a property you already own, or a bridge loan on a property you are purchasing. Each works for different situations, and picking the wrong one costs you money.
Option 1: Cash-Out Refinancing
How It Works
You refinance an existing rental property for more than you currently owe. The difference between the new loan and your old balance comes to you as cash, which you use for renovations on any property in your portfolio.
When to Use It
- You own a rental property with significant equity built up
- The renovation is on a different property in your portfolio
- You want to spread the renovation cost over a long-term loan (lower monthly impact)
- You are not in a rush and can wait 2-4 weeks for the refinance to close
The Numbers
If your property is worth $300,000 and you owe $180,000, a 75% LTV cash-out refinance gives you $225,000, putting $45,000 in your pocket for renovations. Your new monthly payment goes up, but you have capital to improve another property and increase its rent.
What to Watch Out For
- Make sure the property you are pulling equity from still cash flows after the new payment
- Factor in closing costs (typically 2-3% of the new loan amount)
- Some lenders require a seasoning period (6-12 months of ownership) before allowing cash-out
Option 2: Bridge Loans
How It Works
You get short-term financing (6-24 months) to purchase a property that needs work. The bridge loan covers the purchase price. You make improvements, get a tenant in place, and then refinance into a long-term fixed-rate loan.
When to Use It
- You are purchasing a property that needs improvements before it qualifies for permanent financing
- The property is vacant or has below-market rents that will increase after renovations
- You need to close fast (bridge loans can close in 13 days)
- The property does not meet bank requirements for conventional financing in its current condition
The Numbers
Bridge loan rates are higher (8-15% vs 6-8% for permanent financing) but the loan is short-term. If you hold a $200,000 bridge loan at 11% for 6 months while you improve the property, total interest cost is roughly $11,000. If those improvements increase the property value by $40,000 and add $200/month in rent, the math works.
What to Watch Out For
- Have your refinance plan ready before you take the bridge loan
- Budget 15-20% contingency for renovation cost overruns
- Complete improvements and place a tenant within the bridge loan term
Other Options (That Sometimes Work)
Personal Lines of Credit
If you have an existing HELOC or business line of credit, these can fund smaller renovation projects ($5,000-25,000). The advantage is flexibility: draw what you need, pay interest only on what you use, and repay as the property starts generating higher rents.
Renovation Escrows
Some lenders let you roll renovation costs into your permanent loan. You close the purchase with renovation funds held in escrow and released as work is completed. This combines the purchase and renovation into one loan, simplifying the process.
How to Decide Which Option Fits Your Deal
Ask yourself three questions:
- Do you already own the property? If yes, cash-out refinancing is usually the cheapest option.
- Are you purchasing and improving? If yes, a bridge loan handles both the purchase and the renovation period before you refinance.
- How much do you need? Under $15,000, a line of credit might be simplest. Over $15,000, a structured loan gives you better terms.
Before You Spend a Dollar: Run the Numbers
Every renovation should pass this test:
Will the post-renovation rent increase pay for the total project cost (improvements + financing) within 5-8 years?
If a $15,000 renovation financed with a cash-out refi (adding $100/month to your mortgage payment) increases rent by $200/month, your net gain is $100/month. Payback period: about 12.5 years. That is marginal.
If the same $15,000 renovation increases rent by $300/month, your net gain is $200/month. Payback period: about 6 years. That works.
Timing Matters
Between Tenants
The best time for major renovations is during tenant turnover. You avoid disrupting a paying tenant, can do all the work at once, and start collecting higher rent immediately with the new tenant.
Before Peak Rental Season
In most markets, spring and early summer are peak leasing seasons. Complete renovations by March-April to list the improved unit when demand and rental rates are highest.
After Purchase, Before Refinancing
If you bought with a bridge loan, complete renovations quickly. Every month on a bridge loan costs more than permanent financing. Get the work done, place a tenant, and refinance within 3-6 months.
Need financing for your renovation project? Insource Funding provides bridge loans and rental property loans with no income docs, no minimum credit score, and closings in as fast as 8 days. Call (800) 805-3391 or request a quote.