Choose That Credit - What To Finance SFR Builds With

[Bryan Hancock]

Which option would you choose for financing new construction or scrape and new construction of housing?

Option 1
Warehouse line of credit at 80% of dirt plus hard costs. Rates are around prime plus 1% with the option to refinance after year 1. Projects should take around 6 months to construct and sell. 20-day dwell times for pulling new money and loan covenants that could impact other projects. Interest only payments

Option 2
Hard money at 65% of ARV. Note that this is likely more financing than 80% of dirt plus hard costs for our product. Rates are up in the air, but assume 4%ish points and 14%ish rates to be conservative. Payments are also unknown at this point, but assume monthly of some sort

Assume that both credit facilities have more than enough money to finance all of our deals. You can also assume that the hard money will take less time to get for deals. In reality hard money may or may not take less time than drawing on the warehouse line.

Can you see any strategic advantage for procuring dirt quickly absent extra time in the contract? My thought is that there is really no value here in being able to close inside of 20 days. Which option would you choose and why? Can you see any other major tradeoffs other than speed and yield differences? Perhaps bank constraints on new specs could be another tradeoff where hard money wouldn't limit project quantity.