If you’re a real estate investor, there’s a good chance that the majority of deals you encounter are for properties that are already built. It’s likely because while new construction can be a very lucrative venture, it also demands more real estate investing knowledge than a standard fix and flip or managing a rental property. It also might be that out of all the different types of real estate investments, new construction projects are the hardest to obtain financing for. If you’re considering an investment in new construction, you may be wondering how to find financing that properly meets the needs of your project. In this post, we explore the ins and outs of new construction financing so you can be better informed for your next investment.
First, know that new construction loans come in two flavors: construction-to-permanent and construction-only. Construction-to-permanent loans have the ability to convert into a 30 year mortgage once construction is completed, which makes them ideal if you plan to operate the property as a rental. It also has the added benefit of only requiring one closing which can save you money. Construction-only loans, as the name suggests, will only provide financing for the construction of the home. What you plan to do with the property once it’s built will let you determine the type of loan you should take out for your project.
Let’s start with using traditional bank loans for a new construction project. While this is a viable option, most bank loans have strict underwriting requirements and are designed for owner-occupied properties, not real estate investments. The other downside to using traditional loans is their long turnaround time, with some financing programs taking weeks or even months to deliver funds.
If you don’t have as much money to put down, an FHA loan is an option to consider so long as you’re willing to deal with the extra loan requirements. These loans allow for down-payments as low as 3.5% with the rest of the down payment getting subsidized by the federal government.
If you’re already in touch with a builder or contractor, you may hear them offer their own form of financing backed by their preferred lender. This option has the benefit of allowing you to pay the property off and the builder at the same time, but you should carefully consider terms and conditions before taking out such a loan. Some programs may have startlingly high interest rates or poor repayment terms which can hurt the profitability of your investment.
Hard money/Private money loans
The other method for financing a new construction investment is with a hard money loan. These are loans offered by private lenders that often operate in the real estate space. They have the benefit of faster closing times and less stringent loan requirements. This will be the preferred option for investors since it allows you to leverage your position better in the market and move on opportunities you otherwise might not have been able to.
Considerations before applying for a loan
Before you start applying for loans you should have all your ducks in a row, so to speak. Not only will you need to have good credit to be approved, but you should also have a detailed plan for the project including location, budget, and scope. Many lenders will require a plan for your project before approving you for a loan, as well as having all permits in place. This is because applying for and receiving permits can end up taking a very long time, which may affect the success and profitability of your project. You’re also more likely to be approved if you’ve come up with a realistic timeline for the project which you can use to help stay on schedule. Most construction loans will require a minimum down payment of 20-25%. This is because unlike regular home mortgages, they are not backed by any collateral in the form of property. Once you have all these things ready and in order, you should be ready to apply for financing on your construction project.
If you want to save on a new construction investment, work with a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors & developers across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. If you are an investor looking to acquire financing for a property, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.