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Rehab Loans vs. Hard Money Loans for Existing SB-684 Projects

For real estate investors, particularly those working with properties affected by legislation like SB-684, managing costs efficiently is crucial to securing a profitable project. With interest rates climbing and rising expenses, the traditional method of financing through hard money loans often eats into profits, especially for those looking to rehabilitate properties and hold them long-term. However, there is an alternative: Rehab Loans.

Rehab loans offer a structure similar to construction loans, which could benefit investors working with SB-684 projects. But can rehab loans replace the reliance on hard money, particularly for those wanting to rehab properties within the SB-684 framework?

Why Hard Money Loans Are Common?

SB-684, a California bill that simplifies small housing developments, applies to properties with up to 10 units on urban lots smaller than 5 acres. For investors looking to rehab existing properties within the bill’s provisions, financing the project with hard money loans can be an appealing option. However, the high interest rates and points attached to these loans can significantly reduce profitability.

For many landlords and investors, the speed of hard money loans, typically closing within a matter of days, has made them a popular choice. The problem lies in the long-term financial strain caused by expensive payments throughout the rehab and refinance process.

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How Rehab Loans for SB-684 Projects Work

Rehab loans, on the other hand, could be a better option for certain investors looking to hold properties long-term or make substantial renovations within the SB-684 framework. Much like construction-to-permanent loans for primary homeowners, rehab loans are structured to cover both the construction costs and long-term mortgage financing. The key differences lie in eligibility and the project’s intention.

For SB-684 projects, rehab loans generally follow the same guidelines as a typical construction loan or FHA 203(k) loan for owner-occupied residences, including:

80% Loan-to-Value (LTV) Based on After-Repair Value (ARV)

This standard means the loan amount is based on the expected value of the property after the rehab is completed. This could offer significant financing to move forward with a project.

Renovations Must Add Value

Investors would need to show how their rehab plans substantially improve the property's value. Cosmetic fixes are unlikely to qualify, but essential upgrades like electrical, plumbing, roofing, and kitchens will likely meet lending criteria.

Available for Single and Multi-Unit Buildings

SB-684 applies to both single multi-family properties, making rehab loans a viable financing option for projects involving any of these property types.

While rehab loans can provide the capital needed for rehab projects, the approval process tends to be slower than hard money loans. Investors will typically be required to provide a detailed scope of work, show a substantial down payment (often 20% or more), and meet certain credit score requirements. The entire process from application to approval can take weeks, sometimes 45 to 60 days, which is a significant drawback for investors aiming for a fast turnaround.

Do Rehab Loans Offer an Advantage Over Hard Money?

While hard money loans offer speed and ease for short-term fix-and-flip projects, the benefits of rehab loans are more apparent for long-term investors looking to hold property and make substantial improvements. According to Terence Young, a mortgage broker, rehab loans are ideal for landlords who intend to hold the property post-rehabilitation, while hard money is often geared toward investors flipping properties quickly.

For SB-684 projects, rehab loans might be particularly beneficial for investors seeking a long-term investment that aligns with the bill's goals, as it allows the development of up to 10 units. In contrast, hard money loans may only provide a temporary solution, leading to a more complicated and costly refinancing process once the project is complete.

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When Is a Rehab Loan Better Than Hard Money for SB-684 Projects?

A rehab loan is a great option for SB-684 projects if you plan to hold the property long-term and aren’t in a rush to close. These loans typically come with lower interest rates compared to hard money loans, reducing the financial burden during the rehab and long-term financing phases.

However, if speed is essential, particularly for fix-and-flip or BRRRR strategies, rehab loans might not be the best option. The approval process can take months, while hard money loans can close in days, allowing investors to start rehabbing quickly.

Final Thoughts on SB-684 Projects and Financing Options

For SB-684 projects, if you’re looking to hold properties long-term and intend to rehab them significantly, rehab loans could be an ideal alternative to the more expensive hard money loans. These loans offer the benefits of long-term financing with fewer hurdles down the line, allowing investors to skip the refinancing process often required with hard money.

That said, it’s essential to recognize the differences in loan processing times and availability. Hard money loans may remain the best choice for fast-paced, short-term projects, while rehab loans provide a more sustainable, cost-effective option for long-term investments. Investors should evaluate their project’s goals, timeline, and budget before deciding on the financing route that best suits their needs.


Find out what you can build, the budget, and the ROI for your property following SB-684