Foreign Investor Looking to Build and Hold Loan

[Manolo D.]

Hello BP, I have searched a few threads but I couldn't find one that fits what we are looking for. A friend of mine from another country (foreign national) recently connected with me to research for him the possibility of building a duplex to 4-unit for his family and other family members to live in when they are visiting here, and the other to help with the mortgage, and expenses. He doesn't expect to gain money for it, but dreams to break even, and is even willing to spend negative cash flow. He is not your typical cashflow/appreciation investor, he just plays with money and assets. My friend owns and operates a construction company and has government contracts and owns a shopping mall, his contracts have an average of 1M and has an varies between 2-4 a year, foreign assets are around 2M.

So to wrap the story short: 1. He wants to build 2-4 units, use one as vacation house for family and friends, cash flow the rest. 2. He wants to buy the land cash and post it as collateral as best case scenario OR land + engineering & permit costs until everything is ready to break ground (ie a day before demolition/foundation works start) as worst case scenario (say 100-150 land + approved permits). 3. He wants a construction loan, and at the end of the project, turned into a 30 year mortgage (not sure if he could avoid closing costs, but for sure he could avoid selling agent fee). 4. He expects the land plus construction savings (through me, I offered 30k construction management with at-cost reimbursement), to bring total equity of 35-40% from arv (sample computation below). 5. He has a limit of 250k to spend before breaking ground.

What is his best options? Do you know any lenders that I could inquire about this? Any ideas on how we could tackle this issue? The construction will be done in Southern California.

 (ie if the total arv for 3 unit is 1.3M, and he spends 450k on hard construction cost, 250k in land and permit, plus lending + closing & etc costs 100k for a total of 800k, his equity will be 500k out of 1.3M or 38% - just assume everything is correct)

Thank you all.

[Jared Rine]

@Manolo D....Is your friend's business here in the states or in CA?  As in does he do business here and does he have funds here in banks in the US?  

If he does, I think the best route is going to be contacting local banks and then moving up the scale to private money.  Banks have loosened capital when it comes to spec construction, but it will probably be easier to find private money for this, as if he's going to show break even, or not much profit, it might be difficult for a bank to bite.  Once the property is seasoned, I would say he should be able to find conventional financing (might not be fully amortized 30 year financing), but should be able to.

No construction is easy, but best route would probably be to get to permit and then get the loan.  Getting a loan prior is not going to be an easy task.  Numbers look fine though if that's they actually check out and he has some skin in.

Best,

[Bill Gulley]

Don't know his citizenship status or tax status. 

The is not a spec build, it's a contract build and is common for the land to be purchased then subordinate the land to the lender for the construction and later to an end loan. Done every day.

You need plans, specs, a purchase contract/builder's contract, title to the land and the lender will take care of the rest. The lender will want contractor info if they don't know you. License, financials, experience and subs to be used. :)  

[Stuart Birdsong]

@Manolo D.

Manolo,

In my experience, a local bank will most likely be the best option. I have a couple local banks, in Colorado, that will do construction financing into a perm once all units are rented out. However, they generally will only do commercial loans or shorter Amortization loans, 20-25 years, as Fannie and Freddie require 1 year seasoning from completion of construction for conventional financing with 30 year terms. This means that most banks will loan 80% of Loan to Cost in the first year, but will loan 80% LTV following the 1-yr. seasoning. This has been my experience, I would love to know if others have found different lending solutions to clear this hurdle.

[Marcus Svehlak]

Does your friend have income statements or tax returns? Does he own any other assets in CA? Most lenders would prefer not to do construction financing if it's avoidable. It saves them the hassle of incremental funding, project management, etc.  If your friend has other properties a lender could blanket as collateral he could use cash out financing. He would probably get a better rate too. The question then becomes is there enough equity in that additional collateral to make the project feasible.

[Bill S.]

@Manolo D. I don't believe your friend's exit strategy of a 30 year fixed loan is doable for a foreign national. Those kinds of loans are backed by the US Government and I don't believe a foreign national can secure one of these loans. If I'm wrong, I'm sure someone will point it out.  

[Manolo D.]

Originally posted by @Jared Rine:

@Manolo D....Is your friend's business here in the states or in CA?  As in does he do business here and does he have funds here in banks in the US?  

If he does, I think the best route is going to be contacting local banks and then moving up the scale to private money.  Banks have loosened capital when it comes to spec construction, but it will probably be easier to find private money for this, as if he's going to show break even, or not much profit, it might be difficult for a bank to bite.  Once the property is seasoned, I would say he should be able to find conventional financing (might not be fully amortized 30 year financing), but should be able to.

No construction is easy, but best route would probably be to get to permit and then get the loan.  Getting a loan prior is not going to be an easy task.  Numbers look fine though if that's they actually check out and he has some skin in.

Best,

 Not really, his business is in another country, so is his cash, that is why i told him to buy the land in cash to get it free in clear (not sure if that's enough skin in game). He could probably deposit some cash aside from owning the land itself, but i highly doubt if he would like the idea, he would rather roll it in a business than letting it stay in the bank.

The end customer is still going to be him, he won't be selling it to somebody, so I am not sure if that mkpakes it much easier or much more difficult getting the loan.

If your advice is skin in game, maybe free and clear lot plus approved permits will be the best route, then shop for loans. What can you advice further?

[Manolo D.]

Originally posted by @Stuart Birdsong:

@Manolo D.

Manolo,

In my experience, a local bank will most likely be the best option. I have a couple local banks, in Colorado, that will do construction financing into a perm once all units are rented out. However, they generally will only do commercial loans or shorter Amortization loans, 20-25 years, as Fannie and Freddie require 1 year seasoning from completion of construction for conventional financing with 30 year terms. This means that most banks will loan 80% of Loan to Cost in the first year, but will loan 80% LTV following the 1-yr. seasoning. This has been my experience, I would love to know if others have found different lending solutions to clear this hurdle.

 Thanks Stuart, so if it will cost 1M to build, land + hard and soft costs, lenders will lend 800k and he will need to come up with 200k? lets say the build finishes at Dec 2016, he could then apply for conventional 30 year in Jan 2018? Is that going to cost a lot since the loan within 2017 has a really high rate?

[Manolo D.]

Originally posted by @Marcus Svehlak:

Does your friend have income statements or tax returns? Does he own any other assets in CA? Most lenders would prefer not to do construction financing if it's avoidable. It saves them the hassle of incremental funding, project management, etc.  If your friend has other properties a lender could blanket as collateral he could use cash out financing. He would probably get a better rate too. The question then becomes is there enough equity in that additional collateral to make the project feasible.

 No he does not, my friend is a foreign national and only wants to diversify his assets, but his only logical choice is to build and hold, we are both engineers, I could build bridges, he could build malls. His income is not US based, he has tax returns but not here. If he has assets in US that could back the build, that would be the most easiest way. The project will not be sold after the build, so that is another issue, after the build, all he will have is 35-40% equity, no stable income to support the loan except for the rent generated from the other doors, I am not sure if the equity will hold some weight when applying for conventional mortgage.

[Manolo D.]

Originally posted by @Bill Gulley:

Don't know his citizenship status or tax status. 

The is not a spec build, it's a contract build and is common for the land to be purchased then subordinate the land to the lender for the construction and later to an end loan. Done every day.

You need plans, specs, a purchase contract/builder's contract, title to the land and the lender will take care of the rest. The lender will want contractor info if they don't know you. License, financials, experience and subs to be used. :)  

 Foreign national, currently he does not even have itin, so if he has income, he pays top 34-36% if I recall correctly.

Plans, specs, free and clear title, and approved permits shouldn't be an issue, that's what I suggested to him to bring to the table, me and him deal with those regularly, I deal with it weekly. If we were to build, we would be self performing everything, no subs, all in-house employees (frankly, it's not that hard), financials might be a problem, it is not as strong to build a 1-2M project - gross receipts around 300-400k this year if I were to guess and 290k from march 2014-aug 2014 (our 2014 fiscal year), license and insurance is fine, experience??hmmm -- only if they credit foreign builds lol.

[Bill Gulley]

Originally posted by @Manolo D.:

Originally posted by @Bill Gulley:

Don't know his citizenship status or tax status. 

The is not a spec build, it's a contract build and is common for the land to be purchased then subordinate the land to the lender for the construction and later to an end loan. Done every day.

You need plans, specs, a purchase contract/builder's contract, title to the land and the lender will take care of the rest. The lender will want contractor info if they don't know you. License, financials, experience and subs to be used. :)  

 Foreign national, currently he does not even have itin, so if he has income, he pays top 34-36% if I recall correctly.

Plans, specs, free and clear title, and approved permits shouldn't be an issue, that's what I suggested to him to bring to the table, me and him deal with those regularly, I deal with it weekly. If we were to build, we would be self performing everything, no subs, all in-house employees (frankly, it's not that hard), financials might be a problem, it is not as strong to build a 1-2M project - gross receipts around 300-400k this year if I were to guess and 290k from march 2014-aug 2014 (our 2014 fiscal year), license and insurance is fine, experience??hmmm -- only if they credit foreign builds lol.

Go for it, talk to the bank :) 

[George Krajacic]

I am located here in southern California and I am curious which cities are you considering for the project. If you can share that information I might have some suggestions.

George Krajacic

[Manolo D.]

Originally posted by @George Krajacic:

I am located here in southern California and I am curious which cities are you considering for the project. If you can share that information I might have some suggestions.

George Krajacic

Hi @george, before I answer tht, I would like to thank BP for putting My Discussion on top, else, this would be buried deep in the forums. Anyway, we were open to most areas, but originally it was for Carlsbad or nearby those areas. He was open to other locations, LA county, SFV or SGV is also a good area, his exact words were, as long as it is somewhere decent. He has reinvested his 250k somewhere else, last time we talked, it was down to 100k. Not substantial enough to get that "skin in the game" that lenders always look for, and I am now too busy to take on any type of undertaking, we could explore opportunities, so when everyone frees up resources, we could jump right into it.