Investor Loan Education
Investment property financing has its own vocabulary. This section exists so investors can learn how these structures work — the ratios, the draws, the exits — before there is any pressure to apply.
Categories
Four areas that cover most of what investors encounter on a term sheet or in an underwriting conversation.
The language and mechanics behind short-term renovation financing, from valuation to draws and exits.
After Repair Value is the estimated market value of a property once the planned renovation scope has been completed, generally supported by an appraisal and comparable sales.
Loan-to-Cost compares the loan amount to total project cost, which on a renovation project may include both the acquisition price and the rehab budget.
Loan-to-Value compares the loan amount to the property's appraised or market value. On renovation projects, investors often see both as-is and after-repair versions discussed.
Renovation capital is typically released in stages as work is completed and verified, rather than funded in full at closing.
Short-term project financing often uses interest-only payments, meaning scheduled payments cover interest and the balance is repaid at payoff.
The two most common exits on a renovation project are a sale of the finished property or a refinance into longer-term financing.
How rental property financing is evaluated when the property's income does most of the talking.
Debt Service Coverage Ratio measures a property's income relative to its debt obligations, a central input in rental property financing.
In simple terms: property income divided by debt obligations. The precise definition of each input varies by program.
The rent a property could reasonably command in its market, often supported by a rent schedule prepared with the appraisal.
Principal, interest, taxes, insurance and association dues — the components frequently used when measuring a rental property's obligations.
Longer-term rental financing may include a prepayment structure. Understanding it up front matters if you may sell or refinance early.
Where eligible, a refinance can return capital above the existing payoff, which investors often use to recycle equity into the next project.
What builders and developers should understand before financing a ground-up residential project.
Construction capital is advanced against completed phases of work on a defined draw schedule.
The track record of the builder or general contractor on comparable projects is a meaningful part of a construction review.
A contingency line absorbs the cost surprises that most projects encounter, and its absence is a common weakness in a budget.
Approved plans and permit status affect both the project timeline and how the financing is structured around it.
A realistic schedule, phase by phase, is as important as the budget when a project is evaluated.
The completed or stabilized value is the projected value of the property once construction is finished and it is in its intended operating condition.
The vocabulary that appears on nearly every investment property term sheet.
A fee for originating the loan, typically expressed as a percentage of the loan amount.
The review of the property, project, numbers, borrower and exit that determines whether and how a scenario can be financed.
An independent opinion of value, which on investment projects may include as-is, after-repair or completed value.
Legal ownership of the property, reviewed and insured through a title company as part of closing.
Funds or documents held by a neutral third party pending completion of agreed conditions.
An individual's promise to stand behind the obligations of a loan made to an entity.
Financing made for investment or business reasons rather than personal, family or household use.
How long the loan is scheduled to remain outstanding before it matures.
The schedule by which principal is paid down over the life of a loan through regular payments.
Payments that cover interest only, with the principal balance repaid at payoff or maturity.
A fee that may apply when a loan is repaid earlier than a defined period.
WJR Insights
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After Repair Value drives much of the analysis on a renovation project. Learn what ARV represents and how it is typically supported.
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Investor Education
Two ratios that sound similar and measure very different things. Understanding both helps investors read a term sheet accurately.
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WJR Equity Lending can review your financing scenario and discuss what options may be available for the property, project and exit strategy.