House Hacking to New Construction Progression - Financing

[Nathan Hemming]

Hi BP Community,

I'm fairly new to the site, but have been listening to the podcasts daily. Great info, and packed with lots of information. 

I'm a licensed architect working for a mid-size firm, now looking to get involved myself in real estate. I've been involved from the architect side for several years now, but being fee-based income allows for only so much growth potential. I also have experience working for a contractor in college, framing up wood framed buildings. 

My idea is to start with house hacking, maybe a triplex or quad. I think I have enough information to go on, just need to save some more capital and take the dive. 

Then I'd like to progress to multi-family new construction - with the idea of holding the properties I build. I feel confident given my background that the buildings I build would be solid and good long term investments. Always subject to things going wrong, but somehow if I draw the detail and am on site supervising, I think I'll sleep better at night. 

So with that in mind, I'm wondering about financing. I am not sure if I'll do a 203k loan with the house hack, it depends on the scale of the project, or just have a mortgage and pay the construction cost out of pocket. I understand that would allow me to do more of the work myself than a 203k, and have less paperwork. Does that sound right?

If this all goes well and then I decide to transition to new construction - I'm wondering how banks would see a holder of a multi-family property and collateral for a down payment on a construction loan. I know generally banks will want 20-25% down on a construction loan, which could be a substantial amount of cash depending on project scale. I'm sure I'll need lenders to get me to the down payment amount, but the more of that I can cover with personal capital the better. I've also read the potential of banks to allow for deferred architect/developer fees to count towards the down payment, but that seems to vary by location and I don't want to depend on that. 

Does anyone have insight to how a bank would see an applicant for a construction loan who holds a multifamily property on a mortgage? My debt-to-income ratio would be something to consider, but would they see the multi-family I would own as potential collateral on a down payment? I think it depends on my equity in the multi family, but I wonder if only the equity would count or if there's something else I should think about there. 

Also, understandably this is far in the future - I'll need to start with a house hack to get my feet wet, I don't think it is smart to jump in the deep end with a new construction project - unless if having the mortgage on a house hack would put me out of reach on getting a construction loan. Maybe I would want to sell the house hack to get a construction loan - but again ideally I'd like to be a buy and hold or build and hold investor.

I am in the phase of writing a business plan and this is more or less the long term trajectory I'm interested in. 

Any thoughts would be greatly appreciated, and I'm excited to join and become active in this great community!

[Jay Hinrichs]

ON the construction loan side..  this is the hardest loan for someone new to get...

and virtually impossible at a bank if you have no track record..

You generally have to gut it out with equity partners and private or HML to build your book of success's and at least 2 years of profitability before a bank will even take a peek at you.

now there are banks that will do owner occ construction to perm loans.. like here in our area

its Washington Federal.. you may google them and read about the program then see if someone in IL does the same.

the other stuff is just vanilla  federally backed loans no mystery there.

as for your arch fee's as equity.. we really don't see this.. counted as equity at least in our area for resi construction as the fee's are quite nominal IE 3 to 10k to get a finished plans for new construction SFR's up to 4 plex's.