The housing market is going through an inventory shortage. Properties are selling quickly, and usually for more than they’re listed for too. For home buyers and investors, that means you may have a tough time finding the right home to purchase. But instead of buying an existing home, have you considered investing in the construction of a new property? New construction can be the perfect path to home ownership, and it also offers great returns for real estate investors. Continue reading to learn more about construction loans and how to obtain financing for a new construction property.
What is a construction loan?
Before you go all-in on a new construction project, you should understand exactly how a construction loan works. These are short-term loans, issued anywhere from 12-18 months, and they will generally have higher interest rates due to their short-term nature. They can be used to cover the cost of land, labor, building materials, and other expenses associated with building a new property.
There also different types of construction loans: Construction-to-permanent, construction-only, and renovation. Construction-to-permanent loans have the ability to transition a long-term mortgage once construction is completed, and are useful if you plan to rent a property out or live in it afterwards. Construction-only loans, however, can only be used to cover the cost of building a property. Renovation loans are intended for use on existing properties, and are generally used when someone wants to make an addition or major renovations to a home.
Know loan terms and conditions
As mentioned, construction loans are typically issued for shorter periods of time, around 12-18 months. Your lender may be willing to work with you if you need an extension, but they may also charge you for the convenience. It’s very important to stick to your construction timeline for this reason. Most loans of this type will only charge you interest until the end of the loan period, at which point you repay the principal amount. This is so that you can have the resources needed to complete the project and repay the loan after selling/refinancing the property. Every lender will have different terms and conditions, so be sure to talk to yours about the details surrounding their construction loan program.
Make a plan and budget
If you want to obtain financing for a new construction project, you’ll need to have a plan with a specific timeline and a well-defined budget. Most lenders will require that you have a plan so that your project stays on schedule, since they depend on the completion of the project for you to repay the loan. A budget is necessary so your lender knows exactly how much to lend, and because they won’t be distributing your funds in a lump sum. Instead, your funds will be disbursed in a series of payments called draws, with each intended for a different purpose. Lenders take on huge risk with construction loans, and while these requirements may seem strict, they are in place to protect the lender while also ensuring your project turns out successful.
Talk to a qualified, trusted lender
After putting together a budget and construction plan, the next step is to find a lender that can get you the best leverages and rates. Ideally, you will want to go with an established lender that has experience in the new construction space. You may also want to ask for references from friends or other investors. As part of the application process, lenders will look at your creditworthiness and may also ask for bank account statements from you. These types of questions from a lender are a good sign; they want to ensure you are able to cover closing costs/fees, as well as monthly interest payments. A good lender will also be able to provide you with resources and connections to assist you with your project.
RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners 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 finance a new construction, RCN Capital has competitive loan options available. Connect with us today to discuss your next real estate investment.