Multi-Family construction financing question

7 Replies

Hi, 

How would go about financing multi-family construction project (10x 1BR units) given the following starting conditions:

- I own a lot with an existing duplex standing on the lot 

- Lot is mortgaged, remaining mortgage balance around $280K

- Market value of the lot with existing structure is around $0.9M-1M (based on comparable recent sales in the area)

- Estimated architectural fees, approved construction documents set cost: $80-100K

- Available cash reserves (savings): ~$200K

- Estimated new construction cost: $1.8M

- Estimated new property value after construction: $2.5-3M

- About me (first-time developer, 800 credit score, annual income before tax around $200K)

I am pretty sure that I have to pay off my existing mortgage ($280K) before being allowed any construction activities on the lot. Given the facts above, is it feasible for me to get a construction loan that will allow me to cover existing mortgage, architectural/MEP fee, construction cost minus my savings? I would appreciate any advice. 

Thanks!

Hi Ross,

There are plenty of ways to get financing, there is so much information about it on Bigger Pockets! I am sure if the numbers make sense, then you can come up with financing one way or another, it's a question of what terms the financing will be on, as you don't want interest to eat in your profits. In case of a regular construction loan, I am pretty sure you will have to come up with 20-25% down payment. Are you planning to finance down payment with private lender financing? Or are you doing an FHA?

I advice you to make a detailed analysis of the deal in a presentable form, call the banks and shop around. If it is a good deal and you present it professionally to the bank, you should be able to get financing.

@Ross Sib , What is your exit strategy?  Are you planning to sell or hold after stabilization?

 I think you will get the best financing by doing a long term hold, using bridge-to-perm financing from a local bank lender.  

To answer your question, yes, you should be able to cover the majority of soft/hard costs (not including closing costs) with the construction loan.  Keep in mind this is going to be a commercial loan, not residential

Using your numbers in your post,and very conservative loan numbers, here's how I would break this down:

Total Project Cost  = $2,180,000 (280k + 100k + 1.8M)

Bridge Loan @70% LTV = $1,526,000 (Should be able to get interest only payment during construction)

Equity Needed @ 30% = $654,000

Your Current Equity = $200k + Cost of Land (original purchase price, current market value does not matter) 

Don't forget to have cash ready for closing costs, rezoning, legal, etc.

Stabilized Value = $2,500,000

Refi @ 75% = $1,875,000

Cash out @ 25% = $625,000 (minus fees, etc.)

Hi Marina, 

I don't think I can qualify for FHA due to number of units being built (10x). Yes, my main problem now is how to come ups with 20-25% down payment on a 2M construction loan. I am leaning towards institutional bank originated financing, if possible. 

Originally posted by @Marina Draper :

Hi Ross,

There are plenty of ways to get financing, there is so much information about it on Bigger Pockets! I am sure if the numbers make sense, then you can come up with financing one way or another, it's a question of what terms the financing will be on, as you don't want interest to eat in your profits. In case of a regular construction loan, I am pretty sure you will have to come up with 20-25% down payment. Are you planning to finance down payment with private lender financing? Or are you doing an FHA?

I advice you to make a detailed analysis of the deal in a presentable form, call the banks and shop around. If it is a good deal and you present it professionally to the bank, you should be able to get financing.

@Andrew Beauchemin

Thanks for detailed numbers!

So from a bank (commercial lender) perspective can they do the following? 

1. Bank issues to me a 280K loan to buy out my mortgage in exchange for lien on my property; I owe them 280K now; Bank is secured by primary lien; property equity potential went down 1M - 280K=$700K

2. Bank issues the construction loan at $1.8M; I owe them now 1.8M +280K=2.08M; lot equity potential is now $0; LTV =1M (lot cost)/ 2.08M(total)=~50%?; Is this reasonable?

3. I pay interest during construction. 

4. At the conclusion of the construction and after getting the occupancy permit, the construction loan in converted to conventional 30year mortgage. 

Please let me know if the my understanding of the construction lending is valid. 

Thanks!