Build, Rent, Refinance Strategy for New Construction Homes?

Question

Hello everyoneI am a contractor in Florida. Over the years I have been able to obtain most of the major construction licenses including general contractor, plumbing, HVAC, electrical, and roofing. I have employees in all of these trades and we self perform the majority of the work on our new construction projects. The only trades I typically subcontract are cabinets, concrete, framing, and drywall since those tend to already be cheap in my market.

I have been building and selling homes this way for about two years now and it has gone well. Most of the homes I build are for clients, but I have also built a few for myself and sold them.

What I would like to do now is scale this and potentially keep some of the homes as rentals so I can start building a portfolio. Up to this point I have built most of the homes for myself using cash, but it ties up a lot of capital that I feel could be deployed more efficiently if I used financing.

For those of you doing new construction and holding properties, what types of loans or financing strategies have worked best for you? I have seen some people mention building the house and then doing a cash out refinance once it is completed, but I am not very familiar with the process.

Any advice or recommendations would be appreciated.

Clark Thornton · Answer

Great question. Use a construction loan to fund the build instead of cash. Rates are higher short-term, but it frees up your capital for the next project. Once the home is complete and you have a tenant in place, refinance into a DSCR loan. DSCR lenders qualify based on the rental income, not your personal income. When you do the DSCR refi, you may be able to do a cash-out and pull that equity back out to fund your next construction loan. Rinse and repeat.

Once you have a few properties built up, look into a portfolio DSCR loan. Instead of financing each property individually, you bundle them together under one loan. The bigger advantage is that portfolio DSCR loans can often be structured as non-recourse, meaning the lender can only come after the properties themselves if something goes wrong and not your personal assets. For someone scaling a portfolio, that's valuable protection.

The key here is making sure the rent on the new-build will support a DSCR ratio of at least 1.2x before you break ground.

I'm at a RE investment and property management firm in Central Florida. Feel free to message me directly if you'd like more advice along the way.

Brooke Adams · Answer

That’s a pretty strong setup having all those trades in-house, it’s not something most builders can pull off at that level. On the financing side, I’ve seen a lot of people in similar situations lean on construction-to-perm loans or short-term construction financing and then refinance once the project is complete and stabilized. Cash-out refis can work too, but they usually depend on how much equity you’ve built in and whether you meet the lender’s seasoning requirements.

Are you thinking more about holding these long-term, or using a mix where some get refinanced into rentals while others are still built to sell depending on the deal?

Todd Anderson · Answer

@Angelo Mayorga, Congrats on building to business to the point of trying to scale.

We work with a number of builders that are using this same proses to grow.  Most of the builders that we are working with are building for spec and filling the units as soon as they are done.  they then are able to refi or sell to an investor.  This allows them to keep 2 out of 10 or 2 out of every 5 built, depending on their business plan at the time.

For the properties that the builders keep they have a rented property that can easily be financed with a DSCR.

I believe that this is a great way for a builder to be able to add recurring income and possibly even an exit strategy.

Best of luck, and let me know if you may have any interest in having more investors find your properties.

Matthew Bernal · Answer

The strategy you described {build and cash-out refi } is exactly right and your profile as a licensed GC who self-performs makes you a stronger candidate for it than most builders.

Here's how it works in practice. A construction loan funds the land acquisition and build costs with draws tied to completion milestones. Once the home is finished and rented you refinance into a DSCR loan which qualifies on the rental income not your personal income and pull your capital back out to fund the next build. Repeat that cycle and you're building a rental portfolio without permanently tying up cash on each project.

The advantage you have that most investors don't: your cost basis is lower than market because you self-perform. That built-in equity makes the DSCR refi cleaner because your LTV is favorable from completion.

I work with Florida builders and investors on exactly this structure construction financing into DSCR refi. Happy to walk you through what it looks like on your specific builds.

What's your typical build cost and finished home value on the projects you've been doing?

Jonathan Chan · Answer

Scaling through leverage is what a lot of people do. I would still ramp up slowly though. You'd rather build slower and have good systems in place than to scale too fast into chaos. It'll help you. I've had good deals that wouldn't work because of lack of experience. You have a ton of experience, so that's a big plus for you.

Matthew Bates · Answer

Building with cash is quicker and cleaner, but in my area having a good banker who knows you and has a copy of your PFS, especially if your that "liquid" simply buy the land put it as collateral and banks around here finance 100 percent of construction with your cost sheet and a good banker should allow you to build a minimum of 2 but most given your info you've mentioned combined with a solid credit score and track history you should be able to get 3-5 most larger contractors here that sub divide and do several run 2-3 bankers holding 3-5 loans each.

Build, Rent, Refinance Strategy for New Construction Homes?

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