Philadelphia Rehab Fix and Flip Insights from a Local Lender

Gain some insights about rehabbing and flipping properties in Philadelphia. Rocky Butani interviewed John Santilli, President of Rehab Financial Group, a local Philly lender based in Rosemont, PA. Watch the video below or read the transcript below.

Overview

The interview focuses on trends in hard money lending and rehab investing in Pennsylvania—with a particular emphasis on Philadelphia—and explores the evolving strategies, market conditions, and lending criteria that are shaping the industry.

Philadelphia Market Trends

• Core Market Focus:
  Philadelphia is described as the company’s “backyard” and core market, where they have longstanding expertise and a deep understanding of local conditions.

• Urban Revitalization:
  Despite nationwide challenges with housing availability, Philadelphia is experiencing notable inner-city growth. Older, depressed neighborhoods are undergoing significant rehab work. As one property is improved, nearby houses often follow suit—a “contagious” effect that is visibly transforming local communities.

• Key Neighborhoods:
  The greatest activity is noted around college areas:

  • Temple University area
  • University City (near the University of Pennsylvania and Drexel)
  • West Philadelphia
    These areas are seeing both sporadic property upgrades and block-wide improvements.

Expansion Beyond the City

• Suburban Growth:
  Beyond the city limits, there is rising activity in suburban areas like Villanova, Rosemont, and the Main Line.
• Demographic Shifts:
  As the elderly population transitions out, older homes become attractive targets for investors looking to capitalize on emerging opportunities in these regions.

Investor Strategies and Trends

• Flips vs. Rentals:
  • Historically, about 70–80% of projects were flips.
  • Currently, there’s a noticeable shift toward rental strategies due to high interest rates and increased rental demand.
• Creative Rentals:
  Investors are innovating with rental configurations:
  • Single-Family Homes: Reconfiguring common spaces to add bedrooms.
  • Multifamily Complexes: Designing dorm-like setups with communal areas such as gyms and TV lounges to appeal to younger renters who face affordability challenges in homeownership.

Permitting and Construction Challenges

• City Permitting:
  Permitting in Philadelphia remains challenging—comparable to any major city.
• Contractor Expertise:
  Successful rehab projects require knowledgeable contractors. Rehab Financial Group assists its borrowers by vetting and recommending experienced contractors to help navigate the permit process and manage extensive repairs.

Nature of Rehab Projects

• Heavy Rehab Trend:
  Nearly all current projects are heavy rehabs rather than light, cosmetic fixes.
• Increased Investment:
  Over the past three to four years, rehab budgets have increased by approximately 25–35%, reflecting the need for more extensive repairs and upgrades.

Geographic Lending Scope Beyond Philadelphia

• Additional Markets:
  While Philadelphia is the primary focus, Rehab Financial Group also lends in:
  • Wilkes-Barre: An emerging market with significant rebuilding activity.
  • Pittsburgh: Continues to be a strong area for lending.
  • The Poconos and Rural Areas: These markets are experiencing growth, provided the appraised values and borrower experience match the project requirements.
• Economic Variances:
  Areas like Scranton are noted as more challenging due to unique economic issues.

Lending Parameters and Requirements

• 100% Financing Model:
  The company specializes in offering 100% financing for both the purchase and the rehab of properties—with no down payment required—as long as the project falls within established loan-to-after-repair value (ARV) guidelines.

• Tiered Loan-to-ARV Guidelines:

  • New Investors (0–3 projects): Up to 65% of the ARV
  • Experienced Investors (3+ projects): Up to 70–75% of the ARV (with the higher percentage reserved for those handling larger projects)

• Ground-Up Financing:
  Available for new construction, though it requires a 30% down payment for land acquisition if the purchase is below certain thresholds.

• Financial and Credit Criteria:

  • Income Verification: Emphasis on demonstrating sufficient cash flow through bank statements and tax returns, particularly for self-employed investors who may not show high net income.
  • Credit Score Requirements: A minimum FICO score of 620 is acceptable; however, the overall credit profile tends to be stronger (often above 700) because, in group investments or LLCs, the higher middle score is used.
  • Collective Borrowers: When multiple investors form an LLC, the lender considers the highest credit scores within the group.

• Interest Reserves:
  All loans require at least three months of interest reserves to be collected upfront, with interest drawn on rehab amounts exceeding $100,000.

• Experience Considerations:

  • For Inexperienced Borrowers:
    Limited to smaller projects (typically up to two units or projects with rehab budgets around $50,000–$60,000) to mitigate risk.
  • For Experienced Borrowers:
    Fewer restrictions apply, and they have access to higher loan amounts and more favorable terms under the 75% ARV program, provided they demonstrate additional assets.

Unique Value Proposition

• 100% Financing Without Down Payment:
  Rehab Financial Group stands out by offering full financing on both property purchase and rehabilitation, which can lead to significant savings at the closing table compared to traditional lenders.

• Local Expertise and Longevity:
  With a deep-rooted presence in Philadelphia since 2009, the company leverages extensive market knowledge to serve both seasoned and new real estate investors effectively.

• Adaptable Lending Solutions:
  Their approach accommodates a wide range of borrower profiles—from those with little to no experience to those with extensive project histories—ensuring that financing solutions match both the project’s needs and the investor’s capability.