New construction 4 plex funding questions in Sioux Falls SD
Real Estate Investor · Sioux Falls, SD · Member since 2013 · 415 posts · 84 votes
I am in the process of putting together a 4 plex project in which my company will be building. The goal is to have between 25-30% equity in the project when all said and done. I then plan on adding this property to my portfolio as a rental property. My questions for you all is:1) have any of you recently done a project like this and if so how did it turn out for you, 2) I am planning on funding this by Private Money(PM), with all your expertise what should I expect to pay for borrowing funds, 3) as for an exit strategy from PM how long would I typically have to wait to convert this to conventional financing, given that I will have 25-30% equity in the property. If I have the property fully leased for 6 months and it is cashflowing strong would that be suitable or would I be more realistic with a 1-2 year of rents collected? Thanks ahead of time for all your replies.
Welcome to BP Aaron!
First, (I won't load you up with questions) your equity established for financing will be based on cots of construction and land or the appraised value, which ever is less, so your opinion as to equity may not be accurate. On this basis, you can refinance when the project is completed to pay off existing liens without receiving any cash. To refinance with cash out, you'll need to be in title for more than one year or from the date of completion, whichever is longer.
Lenders have some leeway at time leased and counting income, I have had new leases accepted, the lender knows me and have demonstrated experience. A new landlord may need two years of lease income to use such for qualifying income. Conventional financing will usually want two years and an annual lease with 6 months remaining after closing, this will vary some but there are several aspects a lender may look at to compensate for such requirements.
As to cost of money, it depends on your loan amount as it costs more to borrow more, but you can expect about 5% of the value for points, loan and closing costs. Good luck....
Bill G.
Thanks for the info. I have ran into this issue with building some single family homes as well when you say that banks are only wanting to lend based off the cost to build or appraised value, whichever is less. My question on that is would you recommend that I just bill out the entire property and have the cash set aside to use as the 25-30% down payment??? Would this be a way to get around having a property valued at 400k and only have 300k in monies due, since I would have my crews build it from the ground up...
Costs include hard costs paid out, keep reciepts for what goes into building. You don't have a down payment you have paid expenses.
You need to get away from thinking that you have instant equity based on what a property might sell for, that's guru accounting.
Be careful about what you buy and put in as costs, I've seen many builders buy a tool, an air hose, have the backhoe repaired and put it in the cost of that project, that is not an equity or property expense, it's a staying in business expense.
Some lenders only look at hard costs, materials, labor, land, improvements with utilities, and some will allow softer costs like liability and hazard insurances, closing costs from prior transactions, engineering, plans, etc.
Yes, I understand that it has to be costs directly related to the property aka materials and labor. Not sure if I previously mentioned it or not but I am a General Contractor/Builder and would use my own crew for doing a lot of the work. My thinking is if I would bill out as if I would be building the property as a presold for another investor then with the total expenses paid out I would have the 25% cash sitting there to use as a downpayment.
I dont know if I am explaining this correctly or not... Say you came to me and said I want you to build me this 4plex. I wouldn't sell it to you for 300K when I would lose all my profit from doing everything from dirt work, to framing, to finishing. I would sell it for 400k to you. I understand banks are extremely tight and only want to lend 80% of the cost to build or the of the appraised value, whichever is less. My question if I just paid out all the expenses aka the 400k amount then I would be able to say here is 100k for a down payment..
I have ran into this with doing other presold projects the only difference here is that I am the builder and the owner so when I build a property and not take out ANY profit and then have to add an additional 20% on top of that I would have a property in this case with a loan of 240k which I could sell for 400k, thats 60% LTV.
I was hoping that if I used Private Money other than a conventional bank that I would build it for 300k and then for an exit strategy I would refinance to conventional lending and in this case wouldn't they not know anything about the construction? they would just use my income and expense reports along with the rental income for the property and then require me to get a new appraisal to base the LTV off of?
Hi Aaron – I feel like I know you a little bit! You live in Sioux Falls South Dakota, and I even know on which street! (By the way, your book went in the mail today)
I have a couple thoughts and also questions about your posts. What will you be using to secure the money from your personal lender? If they use the for Plex property, the bank you refinance with will already know about that. When I have built homes for cash and then attempted to refinance them, the lender has wanted to see my receipts. The completed value always appraised at a higher amount than the total of my receipts. There are some ways that you can fudge some of your receipts in a legal manner and since you are a builder/general contractor, I'm sure you can already figured that out. I always trade weeks of usage in my Cancun condo as part of the fee to the subcontractor. I simply write two checks of which one is the amount credit I'm receiving for Cancun. The receipt is totaled in my building receipts while my actual cash out-of-pocket is something less.
Those are just a couple of thoughts. I'm surprised you haven't had more input from all the builders here on BP. Good luck. Rich
Rich Weese Thanks for replying to my post!
I look forward to reading your book when it comes!
I have cash as collateral, however not enough to fund the project entirely. Therefore, I would assume that any private money would want a secure interest in the property, as I would myself if I was funding a project for someone else. When you have built them with all cash and then went to refi them.. what time frame are you saying??? as soon as the project is complete or did you wait 6 months, a year etc.? ..
A different idea was if I built a property and had an agreement with a private individual/company to purchase the property for the appraised value( which allows me to get all my potential equity out) and then do a wrap around mortgage ..or maybe its a double close... and repurchase it back from them and allowing them to profit for being the middle man. I wonder if this would be allowed or if a bank would require them to hold the property for a period of time 1st?
~Aaron
Aaron – I have not attempted to refi a recently constructed property in quite a while in my own personal name. Most of what I'm building now is for cash and in the name of an LLC or I may use PM but only on homes that are currently up for sale and expected to sell quickly.
I do know the regulations have changed considerably since the most recent recession/depression. I'm not sure what the banks require now and whether your proposed scenario would pass the test or not. Maybe there are some others that have done this more recently and can chime in. Rich
Thanks Rich.
Its a 4 plex right? I'm confused as to why you're telling him the bank would take the lesser of the appraisal value and/or the loan amount.
Lets say he could would get private money to finance 330k and it cost 330k to build. But when he went to refi it after 6 months, the 4 plex appraises out at 400k.
Couldn't he get loan for 75% of the appraisal value? Its a 4 plex so its treated as residential. There are banks out there that would do a rate and term refi (conventional) on residential property after 6 mos seasoning regardless of what it cost to build.
I don't see how this would be any different. I realize that some conventional lenders require 1 year to use the appraisal price. But he just needs to find a lender that will do it after 6 months and he should be golden here - provided, of course, the 4 plex appraises out.
And that, to me, is the real issue here. How do you appraise 4 plexes? They're treated as residential for lending purposes but does that mean you have to find comps (i.e. other 4 plex sales)?
If so, what if there are no brand new 4 plexes that were sold in the last few months? I can't imagine they're getting turned over very much.
To me, that would be the more significant concern - how do you know what that thing will really appraise for?
Thanks for the reply Mike H..
As being a builder I recently ran into this on a home we are currently building. Being the builder they would "lend" us 80% the cost to build or 80% of the appraised value whichever is lower. Well I have fought many times over and over again is if I build a home for myself and back out all the profit and labor costs etc for being a General Contractor and show that there is more than 20% potential equity in the property why would they only borrow me 80% of the cost to build.
For instance the current home we are building for ourselves I am building and doing a lot of the work ourselves. Total cost to build is 170,000 and the appraisal that the bank ordered came back at 232,000.. as you can see that is close to 26%+ equity based off of the appraisal. but the big kicker is they required us to put 34k (20% of 170k) upfront as collateral to build... so at the end of the day the bank really is only borrowing us 136k for a 232k property.
So I am looking to all you experts for ideas to build this 4 plex and at the end of the day have 75-80% LTV with a conventional loan. Any ideas :) ?
Mike H. also the area I am looking at building this 4plex is a newer development that does have some multi-family complexes in the vicinity along with a new Middle School to open in 2014 and a sports complex all within 1.5 miles from the location.
To me, it should be easy to get the conventional loan you want after 6 mos. The key is to get the initial loan to build it.
Going back to my earlier example and maybe I'll simplify the numbers.
Lets say its going to cost you 300k to build the 4 plex and it will appraise out at 400k. If you can get a private money loan of 300k to fund the construction, then record that loan.
Once you're 6 months in, you should be able to find some banks that will refi you out of that private money loan - rate and term - at 75% (or maybe 70& depending on how many properties you currently own). And they should be able to use the appraisal price amount (400k) as the basis.
I did a rate and term refi on a single family property earlier last year. I had a hard money loan that I rolled the purchase plus the rehab costs into the loan so I was out no money. I then refi'd the hard money loan - rate and term - after 6 months and they went off the appraisal amount and paid off the entire loan.
I only needed to own it for 6 months for them to use the appraisal price as opposed to the purch/rehab price as the basis. 4-plexes run under the same rules as SFH's for seasoning. You just need to find the right bank.
And, yes, this was a conventional loan I got. 30 yr fixed, with really good rates. And this was also a 5-10 loan (i.e. more than 4 mortgages) so the guidelines were that much tougher.
If you have less than 4 mortgages in your name, it should be even easier for you to pull this off.
The other question, then, would be: Do you have a private money lender to lend you the 300k - I mean the building cost? And, if so, will the 4 plex appraise out at enough so that 75% of the LTV will be enough to pay off the loan.
If the answer to both is yes, you're golden. You can technically do this with no money down. Its the magic of private lending.
Thanks Mike H. everything you stated is what I hoped to do. I just wanted to talk to everyone on here to see if anyone has done anything like this already. I want to be able to talk to the PM and tell them I expect to tie up their money for 1 year or 2 years etc. I just wanted to know what was a realistic timeframe to be sure to get conventional financing lined up and approved. So if I am able to get it built in 6 months or less and then get the units rented prior to the finish date (have them move in when finished of course) and then show full occupancy for 6 months, my plan was to get conventional financing to get the PM paid back and have a LTV around 75%.
I only have one other Rental in my personal name currently so yes I am under the 5 mark.
Unless anyone sees it differently, I don't see why that plan won't work. A 4 plex is treated the same as a sfh as far in terms of financing as I know.
I'm not as sure how the appraisal process works but assuming it appraises out where you need it to, then I don't think you're going to have any issue getting this plan to work.
You may have to shop around a little to find the banks that will refi based on appraisal after 6 mos instead of a year. But they are definitely out there.
And given you have less than 4 mortgages, it should be all the more easier for you to pull it off than it was for me. I think you're good to go with the one caveat that conventional guidelines can always change. So even though there are banks that can do it w/6 mos today, thats not an absolute guarantee that they won't change that tomorrow.
That being said, I would say your odds are pretty good the lending guidelines won't get more difficult given the desire to increase lending. So, again, I think its a great plan and IMHO should work like a charm - at least on the financing end.
btw: Can you tell me if thats typically how much equity there is in a 4plex if you act as the GC? Or is it that you're not going to charge all the labor thats incurred during the building of it to get to that equity capture?
Mike H. I wish this is how much equity would be in for being the GC. However, My construction company will do all the dirtwork,framing, siding, roofing, hanging the sheetrock,finish work, painting and then I will probably do landscaping work on it as well. I will just not take out all the labor and profit out of the project that I typically would if I was selling it to someone else. Once I get all the numbers together if I am unable to reach the 25% mark,at least, then I will re-evaluate it, but based on other project recently, I should be right in line to make this go.
I Don't mean to highjack this thread....Aaron, how much would the PM charge in interets. I wouldn't mind getting into the business of lending but need to learn more.
Jose Ramos, Not 100% sure on what the PM would charge on a project like this.. hopefully some of the rest of BP might have done a project like this and can give some insight. I have a rough number in my head on where I am hoping I can get PM funding for but would like to get all my numbers together and talk with a few ppl 1st.
Can anyone give Jose and myself even a ballpark figure of what Private Money would be at for this??
Thanks Aaron,
I will be following you closely. I am actually in the process of debating whether to build a 4plex (4 townhouses) or buy one fairly new in Wisconsin. I will be seeing one next month that was built last year (4)1300 Sqt for 390k including the lot ( they are fully rented), is this a good price? In other words, can i build something for 390k?
Jose Ramos What are the Gross rents on the property? 1300 sq ft are we talking 3/2 units? I am not sure what the market is around your area for cost to build or even the price of lots so its hard for me to answer this specifically. But if you know what the gross rents are everyone on here can enlighten you on what they view as a good deal or not. I know what I am looking at doing around here I am planning on building and having it done under the 400k mark. but that is here. I would assume in San Diego 400k wouldnt get you much.
Yes 3/2 units with solid gross rents--- 20 percent cash on cash return. I was just wondering if a similar duplex can be build for less than $390k but I guess is market dependent. If I can build something similar around this range, I can build one every year. I'll let you know how it turns out.
to me that sounds like a great return!! hope it works out for you ! keep me informed :)