Investor · Brooklyn, NY · Member since 2012 · 86 posts · 14 votes
Greetings everyone,
I've been thinking about a situation I'm in and wanted to run it by the other real estate minds to get your feedback and opinions/ideas. I have a vacant lot that I own free and clear and I would like to develop it into a 3-4 unit building but I'm low on cash and I believe the bank will want me to put down at least 25% if I'm not mistaken. So I'm playing with ideas of how to come up with the funds for construction and I'm thinking about using a hard money lender and then after completion refinancing into a conventional loan. Do you all think this is a good idea or have some other suggestions on how I can come up with financing?
Lender · Wauwatosa, WI · Member since 2016 · 571 posts · 203 votes
9y
@Damian Baynes, Keep in mind that Ground Up Construction is the most difficult of the loan types to get approved. Lenders will first of all look at your experience - if you have no experience doing ground up construction, you will automatically be denied. Here's why: While there are "no surprises" as Rudy mentioned, EXPECT SURPRISES. There is ALMOST no such this as a perfectly smooth ground up construction process from start to finnish. Schedules get interrupted, causing back ups and boosting holding costs. Wrong materials possibly delivered, or a change of mind of materials, causing set backs. Waiting time for city orders and inspections and then delays if something comes up. The list grows increasingly.
Lenders view New Construction as risky, quite risky. There is also no way to prove cash flow, and during time of construction (as with rehabs) it is obviously not producing income, so the lender will want to see tons of reserves on hand to be sure you will be able to make payments and fund the project in draws/phases. If you don't have experience with new construction, I would find someone you trust who does have experience in new construction, and bring them on board with this project. If you plan on pursuing additional construction projects in the future, you will then have experience and skin in the game and will make your future financing requests much more feasible.
Hope this helps! If you have any questions, feel free to reach out. I'd be happy to speak with you.
Wholesaler · San Antonio, TX · Member since 2016 · 1 post · 0 votes
9y
Hard Money is a great way not to put the 25%-35% down that a bank will want you to have. Based on the lender and your experience will determine how much skin you'll have to put in the game. Finding one that will lend on New Construction might be tough as well, with new construction there's nothing equitable but the land, so the first draw won't come until you complete phase 1 of the build. New Construction is nice because there's no surprises, you have material costs, labor, permits,build time and hold time(which is minimized if property is marketed right) and profit. Hope this helps.
San Diego, CA · Member since 2015 · 77 posts · 22 votes
9y
If you build it as your primary residence, you may be able to get in at a low down payment. You may have to live in it for a year after building, but it's a really easy way to start with low cash down. Check with your favorite mortgage lender for other ideas.
Lender · Wauwatosa, WI · Member since 2016 · 571 posts · 203 votes
9y
@Damian Baynes, Keep in mind that Ground Up Construction is the most difficult of the loan types to get approved. Lenders will first of all look at your experience - if you have no experience doing ground up construction, you will automatically be denied. Here's why: While there are "no surprises" as Rudy mentioned, EXPECT SURPRISES. There is ALMOST no such this as a perfectly smooth ground up construction process from start to finnish. Schedules get interrupted, causing back ups and boosting holding costs. Wrong materials possibly delivered, or a change of mind of materials, causing set backs. Waiting time for city orders and inspections and then delays if something comes up. The list grows increasingly.
Lenders view New Construction as risky, quite risky. There is also no way to prove cash flow, and during time of construction (as with rehabs) it is obviously not producing income, so the lender will want to see tons of reserves on hand to be sure you will be able to make payments and fund the project in draws/phases. If you don't have experience with new construction, I would find someone you trust who does have experience in new construction, and bring them on board with this project. If you plan on pursuing additional construction projects in the future, you will then have experience and skin in the game and will make your future financing requests much more feasible.
Hope this helps! If you have any questions, feel free to reach out. I'd be happy to speak with you.
Since you own the land free and clear, land equity can be used as part of the financing program. Depending on the value of the land and depending on the total amount of costs for the project, you may not have to put in any cash equity at all.
Nashville, TN · Member since 2017 · 95 posts · 91 votes
7y
If you own the land free and clear just contribute it as equity to the deal. It will probably be enough to qualify you for the loan if it's a good deal. Just show the bank you have interest reserves set aside for the project. If you don't have cash for interest reserves then i would advise you partner with a builder that can help make the project successful and share in the equity on the back end. If you do have to borrow money i would go for a bridge loan instead of hard money. Hard money is typically very high interest and bridge is less. That's all semantics though. I really don't think you will need as much money as you think if you own the land free and clear.