How to prepare financially and fund a new house build

Question

My husband is a builder/contractor and we plan to build a vacation home in Truckee, CA that we can separate into 3 rentable units but all as part of a single house. We currently have a primary residence and are soon to close on a rental property we plan to use as a short term rental near Yosemite. We also plan to buy one to two more additional rental properties in the next 6 months. We anticipate starting to build our Truckee, CA property in 12 months. What are my financing options for this new build in Truckee? Can his company take out a loan to build it, and if so what kind of loan would that fall under. What kind of financial status is needed to fund this project (estimated cost of 2.5 million)? Would it be better to do this as a personal loan instead and if so should I not purchase other rental properties in the meantime to show as much cash on hand as needed? I'm not quite sure what angle to take on this but would love to do some advance planning.

Thank you!

Mary

Matt Fine · Answer

Uh oh. You said "Placer". I think I know right where your property is, as there are only a few hundred lots in Truckee and on the Placer co side of the line. I think your lot is on septic, right? Your first step should be to talk with the Placer County Environmental Health Dept regarding the availability of a large septic system on your lot. This might require some perc and mantle tests. The county will see that you are potentially going to pump 3x the amount of sewage into the soil. Other properties in that area have been denied when asking to add an ADU because of the septic. Call the Environmental Health Department in Auburn. I think the main septic contact there is Mohan Ganapathy (sp?)Good Luck. Also- Placer County has been the main slow-pokes around here with permit review and turn around time.So sorry - I feel like I just rained on your parade. But it's better to know the roadblocks early.

Mary Parman · Answer

Thank you everyone for all of this great information! Our build technically unincorporated Placer county (not in the Tahoe basin) so I'm not sure what their recent permitting timeframe has been but yes - getting on top of submitting the plans asap. For the layout of the rental, our hope is to have one longterm rental and one possible STR vs midterm rental that can be used for both friends/family or others that may want to rent it. We may do it as a ski lease, summer lease so that it can meet criteria for a longer term option given the STR regulations. This conversation helps me a lot with my loan planning options. Maybe I'll go ahead and start speaking with some various lenders now to know my options in advance.I'm open to more thoughts if you have them!Mary

Matt Fine · Answer

Hi Mary,I'm a contractor in the Tahoe/Truckee area and I built our personal home about 4 years ago. At the time, the construction loan process was a bit of a pain. We used a broker who was able to hook us up with Banner Bank. They financed our build using a 9mo interest only loan of 5%. We choose 9 months, but they also offered 6 or 12 month options too. Banner Bank wasn't great to work with, but they really were our only option. We found that many construction lenders did not want to loan to us if my company was the one doing the build. As much as I told them about the benefits and cost savings of self-performing the build, they didn't care. They all wanted a 3rd party contractor hired for the build. Except Banner. They were fairly new to construction loans at the time, so they may have changed their policies too. I have no idea what you should do with the personal financial side of your question. That's not my lane. But with the build - starting next spring sounds reasonable but you should be talking with architects and engineers now, as most of the local companies are booked up and the planning and building departments are backlogged. I have clients with deck plans that have been in the building department for 10 months now. So my advise is to get plans and permits ASAP and pay for that out of pocket. Then once you have a better understanding of when the permit may be issued, sign on to a construction loan.

Jeff Pollock · Answer

Congrats, Mary! That all sounds super exciting. Is your intention to STR the Truckee place once it’s built, or rent on a more long-term basis? I live in Truckee and have an STR house hack that’s part of my primary, and I know the town has recently implemented stricter regulations around how you can STR if that was the plan. Examples of their regulations are not allowing ADUs to be eligible for STR permits and also a one year waiting period after a house is acquired before it will be eligible for an STR permit to discourage investors buying housing inventory for the purpose of STR. Not sure how that rule relates to a new build though. Just want to make sure you go into the plan with eyes wide open around town regulations and make sure you can play by the rules!