Best Loan for Building an Income Property

[Nicole Krenzin]

We own a piece of land, free and clear that is worth about $50,000. It's in a niche area that has huge growth potential over the next couple of years. We would like to build a small home and then use it as either a STR or LTR. We already own one LTR (worth $420k, owe $55k), and I manage several STRs. We have excellent credit, and about $25k in liquid savings, would like to use the equity in the land as at least part of the down payment. What would the best loan product for this situation be? The lenders I have spoken to so far say that conventional loan is not possible since it's not primary or secondary, and we would need to do ARM Commercial loan, and the AR makes me nervous.

[Pierre Guirguis]

Since the property will be an investment from day one, most lenders won’t allow conventional financing, which is why you’re being pointed toward commercial or portfolio products.

A common structure for situations like this is a construction loan for the build, then refinancing into a long-term rental or DSCR loan once the property is completed and rented. Since you already own the land free and clear, many lenders will allow the land value to count toward your equity in the project, which can reduce the cash you need to bring in.

The ARM piece you mentioned is common with smaller commercial construction loans, but many investors simply use it as a short-term build loan and then refinance into fixed-rate debt once the property is stabilized.