Creative ways to finance your renovation

When I saw a house come on the market that was very similar to a property we had just bought I could not wait to get into it.  

The home was only four doors down and was listed for $30,000 less than what we paid for the nearby property.

Built in the 1970s by a well-respected builder, it had a layout we loved and a solid quality of construction that is hard to find.

And, that area is one of our favourites because of its close proximity to two great schools, shopping and the bus route. Good homes in that area attract great tenants easily.

The property was in excellent condition - it even had a new roof and a new furnace. The layout was also perfect for the simple addition of a legal suite which would give this property strong cash flow.

The only issue with the home was that it hadn't been touched cosmetically since it was built. Right down to the shag carpet, bamboo covered ceiling, green and yellow neon light fixtures, and crazy psychedelic black and silver wallpaper - this home was an original 1970s creation.

It was going to cost us $310,000 to buy the property and another $70,000 for the renovation and the addition of the legal suite.

We estimated that this property would be worth at least $400,000 after the work was complete, and would net out about $500/month positive cash flow with both suites rented.

The challenge If we used a bank to finance the purchase we'd have to put up about $65,000 for down payment and closing costs PLUS we'd have to pay for the renovations. We didn't have that kind of cash sitting around.

The ideal scenario for my husband and I on a deal like this is to get a VTB (seller financing) to fund as much of the initial purchase of the property as possible and we would raise the renovation costs in a short-term private money loan or through a line of credit. That would not work in this case because it was an estate sale.

There were several siblings involved and they said no to seller financing (the VTB).

Our finance solution to the 1970s renovation project

- Raise short-term private funds to buy the property outright with cash. In this case the timing was exquisite as my parents had just sold an apartment building they'd owned for 30 years.

They had $200,000 sitting in their bank account to pay capital gains taxes. They needed their money back in four months for CRA but were happy to loan it out to us for a small fee.

We made up the difference in funds by putting a second mortgage on one of our other properties by borrowing RRSP funds from a fellow we met at a local real estate investing club meeting.

Because it was a second mortgage we were paying a higher interest rate (11%) but we were free to use the funds for whatever we wanted.

- We found a JV partner who wanted a long-term hold. We put her down payment funds towards the cost of renovations.

- We completed the renovation, slightly over budget and definitely a little later than we'd planned (we learned a few lessons about working with tradespeople and the city permit processes for legal suites).

We then rented both suites. Once we had leases in place, we went to the bank for financing.

- We financed the property at the new value based on the bank's appraisal ($402,000), pulled out all the money we needed to pay back the private lenders, and gave us a small pay day.

If my parents had not had a big chunk of money sitting around at the time, this would have been a little trickier but it still would have been possible.

As I wrote in my article on raising private money in the September 2010 issue, once you know how to raise private money you'll find there are actually a lot of people who have cash sitting in their bank that would happily loan it out for a short period of time (or even a long period of time) if the opportunity is right for them.

To get the inside scoop on financing strategies to maximize your ROI on renos, pick up a copy of our December issue, on newsstands until Dec. 5.