Investor · Austin, TX · Member since 2013 · 21 posts · 6 votes
Just trying to get some ideas on construction loan. I am thinking about building a house in Austin area (lot not purchased yet either). I am trying to think of what would work best- one time construction loan, borrow against 401K, selling stocks, or pulling out equity I have in other rentals?
401K I get to pay myself the interest but at a higher rate. If I sell stocks, I have to pay taxes.....I have some good equity in rentals....I don't know, just trying to get options that leverage the most out of what I have.....
I'm looking at a lot 200-300K range and house smaller in about 400K to build...maybe its better to do land with equity since land loans seem to be higher unless you do the one closing cost construction loans....
I have not done a new build on my own before so anyone who has done this while leveraging their options, please let me know.
Lender · FL · Member since 2023 · 27 posts · 17 votes
3y
Hello Lyn,
It depends on your needs and the project. Hard money is an option. You can apply for a new construction loan. This type of loan has its pros and cons but everything does. These loans are usually Dutch, have no prepayment penalty, last 12-24 months, and are interest only. The requirements for approval are more flexible, but if you have no previous experience the LTC will be lower. The con is that the rates are higher than a regular loan and lenders will likely not approve of the loan if it's not for investment purposes, by these I mean your intention must be to sell or rent the property once finished, not live in it.
I do not recommend a land loan if you intend to construct, it has higher rates than a construction loan and you get less LTV on the loan
Investor · Scottsdale, AZ · Member since 2021 · 51 posts · 29 votes
3y
It really just depends on your individual financial situation and preferences. Here are some pros and cons to consider for each option:
One Time Construction Loan:
Pros:
Typically requires a lower interest rate than other types of loans.
The loan can be tailored to meet your specific needs for the construction process.
The loan is often dispersed in stages to help manage cash flow during the construction process.
Cons:
You will need to have a good credit score in order to be approved for a construction loan.
If the construction process takes longer than anticipated, you may need to extend the loan or get an additional loan to complete the project.
Borrowing from 401K:
Pros:
There is no credit check required to borrow from your own 401K.
The interest rate is often lower compared to a traditional loan.
Cons:
You will be taking money out of your retirement funds, which may hamper your future savings.
There may be fees or repayment penalties for early withdrawals.
Selling Stocks:
Pros:
Selling stocks can provide a quick source of cash.
Cons:
There may be capital gains taxes when you sell stocks.
Selling stocks may not provide enough cash to cover the cost of construction.
Pulling out Equity from Rental Properties:
Pros:
If you have enough equity in your rental properties, this can provide a good source of cash.
Cons:
Depending on the equity you pull out, you may have higher monthly mortgage payments for your rental properties.
Pulling out equity from rental properties may not provide enough cash to cover the cost of construction.
Overall, it is important to carefully consider each option and to consult with a financial advisor to determine the best course of action for your individual situation.