I’m looking for advice on the best way to finance a project.
My friend has done 3 of these so far, and I am planning to join him on the next one with hopes of expanding the business in the coming years.
Here is the short of what we will be doing:
Buy a house for ~ $500-800k.
Remodel if needed.
Split property into two.
Build a DADU.
Sell house and DADU separately.
(Depending on size of lot we may be able to build an ADU and DADU)
Approximate cost of the DADU will be $300k.
Total time from purchase to sale of all properties will be 6-10 months
His previous projects were financed with his own HELOC and some money from a partner he no longer wants to work with.
Most of the reading and research I’ve done so far has been confusing in regard to mortgages/loans for our situation.
Every time I search for small business or construction-type loans, it gives me information on loans for those building their own house to then live in later.
So here are my questions:
First, what is the best way to get a mortgage for the initial house purchase? In my brief research so far, it seems as if I can’t simply take out a traditional mortgage since we don’t plan to live there.
Second, what is the best way to take out a loan for construction costs? Do traditional banks give these out? Is an SBA 7a loan something that could be used down the road? Is hard money our only option right now?
Lastly, is there any type of loan that combines the two? Meaning, could we get a mortgage/loan for, say, $1M, buy a house for $700K, and use the rest for construction costs of the DADU?
Thank you for any advice you can give!
Also, any suggestions for good beginner books/blogs/etc. to read would be much appreciated!
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
3y
@Mike Neville, you can take out an investment loan if you are not planning to live in the property. A lot of investors refinance with a hard money lender after a year or so. The HML will finance building the DADU and refinance the house. Primarely because most probably the original lender will not be cool with you build something on part of the lot
Real Estate Agent · Puyallup, WA · Member since 2022 · 551 posts · 379 votes
3y
This is a great question, I can't wait to see what some lenders have to say about this.
From my experience, the best way to do this may be to bring in more investors or raise private money. There are Hard Money lenders out there that do help with rehab costs BUT I am not sure about the funding of a DADU.
Realtor · Bellevue, WA · Member since 2019 · 882 posts · 1k+ votes
3y
@Mike Neville, you can take out an investment loan if you are not planning to live in the property. A lot of investors refinance with a hard money lender after a year or so. The HML will finance building the DADU and refinance the house. Primarely because most probably the original lender will not be cool with you build something on part of the lot
Real Estate Agent · WA · Member since 2021 · 254 posts · 173 votes
3y
My friend has also done this in the Seattle area. I agree with @Nathan Harden. Hard money lenders from investors are usually the most versatile way through going about this.
Lender · Member since 2022 · 1k+ posts · 508 votes
3y
@Mike Neville, I work with lenders that will work with investors do fix and flips with any level of investor experience where the middle mortgage credit score as low as 660. The lenders with lend on non-owner occupied single family and multi family up to 4 units.
The lenders will lend on a 85% of purchase price (so the buyer/borrower comes in with a 15% down payment) and 100% of construction loan amount with maximum after repair value LTV 70%. They offer up to 12 month interest only payments. You're exit plan at that point (or before the 12 months are up) is to sell the property of finance into a longer term loan if it's going to be a rental such a DSCR loan. These lenders also do DSCR loans. I'll send you a message as well.
Lender · San Diego · Member since 2021 · 80 posts · 56 votes
3y
Hey Mike!
I would suggest using hard money for both. First, for a fix and flip loan to rehab the main house while you work with the city on splitting the lot and with an architect for permit/plan approval. Once that happens you can apply for a construction loan for the DADU and ADU build.
Real Estate Agent · Jh1 Homes - Seattle & Tacoma · Member since 2022 · 32 posts · 15 votes
3y
Getting a Mortgage for the Initial House Purchase: FHA at 3.5 % down is the best way to leverage your cash for a house hack. If you don't plan to live in the house, obtaining a traditional mortgage can be challenging since most lenders typically require the property to be owner-occupied. However, there are alternative options you can explore:
a. Investment Property Loan: Lenders offer specific mortgage products for investment properties. These loans usually require a larger down payment and may have higher interest rates compared to traditional mortgages.
b. Portfolio Lenders: Some local banks or credit unions may offer portfolio loans where they keep the mortgage in-house instead of selling it to secondary markets. These lenders have more flexibility in their lending criteria and may be open to financing non-owner-occupied properties.
c. Private Lenders: Private individuals or companies may provide financing for investment properties. These loans often have higher interest rates and shorter terms, but they can be a viable option for short-term financing.
Taking Out a Loan for Construction Costs:
There are multiple options available to finance construction costs. Here are a few common options to consider:
a. Traditional Construction Loan: Many banks and credit unions offer construction loans specifically designed for building or renovating a property. These loans typically have a variable interest rate and require detailed plans, contractor estimates, and periodic inspections.
b. SBA 7(a) Loan: The SBA (Small Business Administration) provides loans to small businesses, including construction projects. While SBA loans can be used for various purposes, they usually require a well-documented business plan and may have specific eligibility criteria.
c. Hard Money Loan: Hard money loans are typically short-term, high-interest loans provided by private individuals or companies. They are based on the value of the property and require less emphasis on the borrower's creditworthiness. Hard money loans are often used when traditional financing is not available or when speed is essential.
Loans Combining Purchase and Construction Costs:
In some cases, you may be able to combine the purchase and construction costs into a single loan. Here are a couple of options to consider:
a. Construction-to-Permanent Loan: This type of loan combines the financing for purchasing the property and the construction costs. It starts as a short-term construction loan, which then converts into a traditional mortgage after the construction is completed. This option streamlines the process but may require detailed plans and a reputable builder.
b. Renovation Loan: If the property you're purchasing requires significant renovations, you could consider a renovation loan. These loans provide funds for both the purchase and the renovation costs, allowing you to finance the entire project in one mortgage.
For beginner resources on real estate investing and financing, here are a few suggestions:
"The Book on Investing in Real Estate with No (and Low) Money Down" by Brandon Turner
"The ABCs of Real Estate Investing" by Ken McElroy
"The Millionaire Real Estate Investor" by Gary Keller
BiggerPockets (www.biggerpockets.com): A popular real estate investing website with forums, articles, and podcasts.
Investopedia (www.investopedia.com): A comprehensive financial resource website with articles and tutorials on various topics, including real estate investing.
Remember, it's always a good idea to consult with a financial advisor or mortgage professional who can provide personalized guidance based on your specific situation and local regulations.
I’m looking for advice on the best way to finance a project.
My friend has done 3 of these so far, and I am planning to join him on the next one with hopes of expanding the business in the coming years.
Here is the short of what we will be doing:
Buy a house for ~ $500-800k.
Remodel if needed.
Split property into two.
Build a DADU.
Sell house and DADU separately.
(Depending on size of lot we may be able to build an ADU and DADU)
Approximate cost of the DADU will be $300k.
Total time from purchase to sale of all properties will be 6-10 months
His previous projects were financed with his own HELOC and some money from a partner he no longer wants to work with.
Most of the reading and research I’ve done so far has been confusing in regard to mortgages/loans for our situation.
Every time I search for small business or construction-type loans, it gives me information on loans for those building their own house to then live in later.
So here are my questions:
First, what is the best way to get a mortgage for the initial house purchase? In my brief research so far, it seems as if I can’t simply take out a traditional mortgage since we don’t plan to live there.
Second, what is the best way to take out a loan for construction costs? Do traditional banks give these out? Is an SBA 7a loan something that could be used down the road? Is hard money our only option right now?
Lastly, is there any type of loan that combines the two? Meaning, could we get a mortgage/loan for, say, $1M, buy a house for $700K, and use the rest for construction costs of the DADU?
Thank you for any advice you can give!
Also, any suggestions for good beginner books/blogs/etc. to read would be much appreciated!
That's going to be a complex one. I think timing might be a concern for you as the traditional 12-month build might not work. I would be concerned about getting the lot split done in a timely manner...at least to then give you time to get through permitting and then build the ADU. Any initial financing you do is going to tie up the entire property, so you'll have to make sure the lender inserts a "partial release clause" that states that they will release each lot for $X paid down on the loan. In your second question, you asked if the SBA or a conventional bank would do the deal. The SBA doesn't do real estate investment deals, but a small community bank might bite on it. They are, however, heavily regulated and regulators hate smaller real estate investors. That route's going to be a long shot. Regarding your third question, I think the loan is unusual enough to where you might have to go with private money backing the deal. Any of the institutional lenders we work with will have a tough time shoe-horning a square peg into a round hole. It might be too much customization for them. I would try to sell an individual or group of investors on the deal and have an attorney get really creative with the paperwork to define exactly the type of deal you're wanting to do. I applaud your creativity, but it might be too creative for a rigid institutional lending structure to bite on. Good luck to you.
Specialist · NJ · Member since 2022 · 1k+ posts · 653 votes
3y
Well, you have quite a few strikes working against you as far as getting this deal financed with hard money.
Let's say you brought this to me and wanted to see if I could get you some pricing and see if I could get a pre-approval.
Questions I'd have for you as a lender:
1) This is a big deal, you're talking about putting up 20% of 600k let's say. That's 120k right there. Then this will be a million dollar loan and because of this deals complexity and scope and price range you will pay 2 - 3 points all day. That's another 30k you need and then you'll need to show 9 loan payments in the bank on a million dollar loan that will be 75k - 90k for 9 payments. We're at 240k in liquidity and we didn't add insurance or title costs or the fixed closing costs from the lender and then they will ask for a 10% liquidity buffer which means you need to show me 300k in liquid assets before I even bring this to underwriters and ask them if they would consider a deal like this.
2) With the scope of what you want to do the rehab budget will be scrutinized heavily and this will be deemed an "extensive rehab" by any lender who even had a thought of doing this. Extensive rehabs have leverage reductions to them, at least 5%, so now you're talking about putting up 25% and getting a rate hike. I work with an investor on West Coast who has done 40 projects since 2020, he has 400 projects completed prior to covid. He works in the higher end of a big city. He wither builds new or rehabs an existing structure and he builds huge additions just like you want to do. He has great credit and he has a bank statement with a million in cash in it and he is a whale for experience. You wanna hear his loan terms?
3 - 4 points
15% interest rate
But he gets 100% financing up to 65% ARV and I mean 100%. Acquisition, rehab, loan payments, title, insurance, points. He comes out of pocket 0.
You are working in the same price range he does, but you guys DO NOT have his experience. You are not going to like the loan terms you receive from any lender who even agrees to entertain this.
It's hard to start at this level and need financing. Look at it from the Lenders point of view, if it was your money would you lend someone money for a massive project and they have zippo experience, and I know your partner has one he did with cash from a HELOC, but you are talking about institutional money now.
Like I said, it's hard to start here for most, especially if you need financing. A lender won't even entertain this. I couldn't bring this to a treasury team or underwriting team and expect to take me seriously, unless of course you can produce a bank statement with 500k in it,but then why would this be your plan if you really had the money to do this deal.
I mean if you have let's say 100k to invest, I could direct you to markets where you can BRRRR and start picking up duplexes and triplexes and get most of your investment back in the refi. Maybe keep 10k or less in the house by the time it is rented. You could have 10 doors in two years, be cash flowing 3k+ per month, and have a real estate portfolio worth 2 Million. And then you can build from there.
I don't understand your strategy here. I guide my clients to do what I suggested above, especially when starting. I'd much rather see someone in a deal that will require 25k in capital than 250k. Someone with little to no experience won't even be taken seriously with the deal you have laid out, unless of course you have a million in the bank, but then there's like a zillion better strategies than this one, just my opinion.
Lender · Washington DC · Member since 2015 · 2k+ posts · 2k+ votes
3y
You can purchase non owner occupied with 20% down traditional. Or DSCR if the property can cash flow. Tenant in at closing. Call this loan #1.
Go get the plans approved/ specs/cost breakdown- may take 20 months. You need to split the lots into separate parcels and planning department may or may not allow this. Conditional use permits and hearings may come into play. Your plan is not a fit under ADU and DADU laws that allow someone to add a unit to their existing property and hold and rent as is- the sale of the units is a whole different animal.
There are manufactured and prefab manufacturers that can finance the construction but once you break ground the first is paid in full. You will pay the loan fees/title/escrow a second time.
There are construction loans where you could borrow 80% of final value of each separate house, not one for all three parcels. The lot where the existing house loan #1 and loan sits is an issue- the mortgage lender will want to be paid off in full or paid down. That one existing mortgage was qualified with appraisal conditions, loan to value, and a program that now changed. The mortgage is higher risk with less land and crowded units next door under construction. I highly doubt the existing lender will allow you to split the lot. If loan #1 is a traditional loan they will not give you a partial release.
Few to no construction lenders are going to give you two construction non owner spec transactions at the same time, and you need a new refinance for loan #1. Hopefully your FICO and income are better than when you closed loan #1. You will pay for three seperate loans/title/escrow at this stage. Pray the value increased now two years later or you have $100000 cash to pay down loan #1 into the new refinanced loan.
I think hard money is your only option to get the other two construction loans you need.
Neighborhood where you purchase is going to accept small houses on small lots... I mean this is the way the other houses on the block appear. The reason for this is the city or county planning has a say in the use of utilities and the neighbors can dispute the plan. Go look at the General Plan for the future and past hearings this will tell you a great deal.
You need a bag of cash. You need a W-2 job that stabilizes you for three or four years to complete your plan as your credit and income has to remain squeaky clean in the future. We cannot predict that values will increase to help your plan. You are going to pay $5000- $20000 in fees for each of these four loans, so pencil that in. DADU value is not equal to single family stick built.
SBA program is a no way in the world.
Construction loans in two or three years when you need two may or may not exist. Mortgage lending is in an imploding trend not expanding. No idea what rates will be in the future. I assume demand for housing will increase, so this smiles on your plan. You need $160000 to do #1 loan then another $320000 to do the next three loans ($480000 in checking/savings plus reserves of whatever all your bills are X 24)
I’m looking for advice on the best way to finance a project.
My friend has done 3 of these so far, and I am planning to join him on the next one with hopes of expanding the business in the coming years.
Here is the short of what we will be doing:
Buy a house for ~ $500-800k.
Remodel if needed.
Split property into two.
Build a DADU.
Sell house and DADU separately.
(Depending on size of lot we may be able to build an ADU and DADU)
Approximate cost of the DADU will be $300k.
Total time from purchase to sale of all properties will be 6-10 months
His previous projects were financed with his own HELOC and some money from a partner he no longer wants to work with.
Most of the reading and research I’ve done so far has been confusing in regard to mortgages/loans for our situation.
Every time I search for small business or construction-type loans, it gives me information on loans for those building their own house to then live in later.
So here are my questions:
First, what is the best way to get a mortgage for the initial house purchase? In my brief research so far, it seems as if I can’t simply take out a traditional mortgage since we don’t plan to live there.
Second, what is the best way to take out a loan for construction costs? Do traditional banks give these out? Is an SBA 7a loan something that could be used down the road? Is hard money our only option right now?
Lastly, is there any type of loan that combines the two? Meaning, could we get a mortgage/loan for, say, $1M, buy a house for $700K, and use the rest for construction costs of the DADU?
Thank you for any advice you can give!
Also, any suggestions for good beginner books/blogs/etc. to read would be much appreciated!
Hey Mike - great questions! I'm in the process of doing this myself currently. There's some creative ways you can finance the project. Depends if you are pre or post condo-ization, but you can have the main house & the DADU construction financed separately.
First, what is the best way to get a mortgage for the initial house purchase? You can do a 20% conventional loan here. There's other investor friendly loans & 1 lender I work with that can do 10% down as an investment loan (no not a second home loan; investment loan).
Second, what is the best way to take out a loan for construction costs? I think hard money or private money is typically a smoother process & less hurdles to work with. Otherwise, you can try to structure some equity or debt deals with friends to finance that way as well.
Lastly, is there any type of loan that combines the two? Yes; there are conventional loans that allow you to build DADUs now as well.
If you're curious, I'm talking about a lot of this stuff on my Instagram as well: @helloericyu.
