Budget for the purchase, renovation and carrying costs
Financing a rental renovation means funding the purchase, the work and the mortgage payments and property expenses while construction is underway. The budget also needs to cover the period before the property earns the expected rent or a refinance becomes available.
In Dalia Barsoum's archived Adapt & Thrive interview, Danielle Chiasson highlights the need to consider the capital required through the end of a project. The project needs a funding plan for the whole period between the purchase and the sale or refinance intended to repay the borrowing.
Match the funding schedule to the renovation schedule
Start with the scope of the renovation and when each cost is expected. Include payments and property expenses that continue while the work is underway. Keep expected rental income separate from income already being received.
Beside each stage, identify the source of funds and what must happen before they can be used.
Stage | Funding questions to resolve |
|---|---|
Purchase and preparation | What funds are needed to close, and what remains available for the work and carrying costs? |
Work underway | When are payments due, which funds would meet them and what happens if the scope or timing changes? |
Completion and rental income | What costs continue while work is completed and expected income is being established? |
Refinance or sale | What must be in place to complete the transaction, and which loan payments and property costs continue until then? |
A total project budget and a funding timeline answer different questions. Enough money on paper can still leave a gap if it is expected to arrive after a payment is due.
Apartment-building financing
Plan funding from purchase to completed project.
The budget needs to cover the purchase, renovation or construction, and mortgage payments while the work is underway.
Acquire or refinance the building.
Assess the current income, expenses and financing alongside your contribution and the reason for borrowing.
Carry the property while work is underway.
Allow for the work’s budget and schedule, and the costs of owning the property before the completed work produces rental income.
Plan for the completed rental operation.
Examine the expected income, expenses and financing after completion, including the assumptions behind any planned refinance.
Expected improvements and a projected refinance are assumptions to assess. They should not be treated as funds already secured.
Check when funds are released and what the lender requires
Ask what the lender has agreed to fund and when the funds would become available. If the arrangement involves funds released in stages, ask what evidence, inspections or other conditions apply before each release. Keep any costs you must pay first visible in the plan.
Review the proposed work with your mortgage professional rather than assuming the existing financing accommodates it. Confirm the scope, permissions and completion requirements with the appropriate project professionals as well.
Funding schedules and conditions vary with the lender, property and work. Confirm them for the proposed loan before relying on funds to pay a contractor or another project expense.
Assess the intended refinance before relying on its proceeds
If refinancing is meant to repay project debt or release capital, establish the property value, rental income and completed condition the plan assumes. Your mortgage advisor can explain what information the intended lender needs and what still has to be assessed.
Completing the renovation does not by itself establish the refinance amount. The lender still assesses the property and your circumstances, and any commitment may have conditions that must be met before funding.
Work through the amount that would remain after repaying debt and meeting transaction costs. Avoid treating a hoped-for property value as funds already available to finish the work.
Prepare for delays between completing the work and repaying the loan
Compare the loan’s repayment date with the expected completion and refinance dates. Property expenses and interest may continue if the work or financing takes longer. Establish how those costs and the loan repayment would be covered if the refinance were delayed or released less money.
For a private mortgage, examine a realistic exit and a fallback with your mortgage professional. Include the full costs and the terms if the intended repayment cannot occur on time. A renewal or a later conventional mortgage should not be assumed.
The rental-property reserves guide can help you distinguish cash set aside from approved borrowing and funds still dependent on a future transaction.
Discuss the project’s costs and financing with Streetwise
Bring the purchase or existing mortgage information, proposed work, cost estimates, expected payment dates and intended source of repayment. Identify what has been confirmed and what is still an estimate.
Explore investor financing for a rental-property plan. For an apartment-building renovation or repositioning, explore multifamily financing.
The complimentary Financing Roadmap™ starts with your goals, reviews your finances and property plans, then explains financing recommendations and the steps needed to pursue them. Contact Streetwise to discuss what you want the project to accomplish and the timing involved.
Watch the original interview
Adapt & Thrive: Expert Interview with Danielle Chiasson
Danielle’s investment decisions, operational ideas and personal results reflect the 2022 recording. They do not establish current financing terms or expected results for another renovation.
