Hard money loan to finance a new construction?

[Damian Baynes]

Greetings everyone,

I've been thinking about a situation I'm in and wanted to run it by the other real estate minds to get your feedback and opinions/ideas. I have a vacant lot that I own free and clear and I would like to develop it into a 3-4 unit building but I'm low on cash and I believe the bank will want me to put down at least 25% if I'm not mistaken. So I'm playing with ideas of how to come up with the funds for construction and I'm thinking about using a hard money lender and then after completion refinancing into a conventional loan. Do you all think this is a good idea or have some other suggestions on how I can come up with financing?

Thanks,

Damian

[Marty Johnston]

@Damian Baynes, Keep in mind that Ground Up Construction is the most difficult of the loan types to get approved. Lenders will first of all look at your experience - if you have no experience doing ground up construction, you will automatically be denied. Here's why: While there are "no surprises" as Rudy mentioned, EXPECT SURPRISES. There is ALMOST no such this as a perfectly smooth ground up construction process from start to finnish. Schedules get interrupted, causing back ups and boosting holding costs. Wrong materials possibly delivered, or a change of mind of materials, causing set backs. Waiting time for city orders and inspections and then delays if something comes up. The list grows increasingly.

Lenders view New Construction as risky, quite risky. There is also no way to prove cash flow, and during time of construction (as with rehabs) it is obviously not producing income, so the lender will want to see tons of reserves on hand to be sure you will be able to make payments and fund the project in draws/phases. If you don't have experience with new construction, I would find someone you trust who does have experience in new construction, and bring them on board with this project. If you plan on pursuing additional construction projects in the future, you will then have experience and skin in the game and will make your future financing requests much more feasible.

Hope this helps! If you have any questions, feel free to reach out. I'd be happy to speak with you.

Best Regards,

Marty