We are under contract on a 4ac tract we would like to build a rental town home community on. Zoning is on board with residential units 6-8 per acre although the geography would likely only support around 16-18 townhomes. What is the best creative way to finance the development? Rent comps are ~2k/unit and we manage a few properties in the same highly ranked school district and the demand rental demand is crazy.
Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes
4y
What you are describing is a development loan. Hard / Private money lenders will only lend about 50% LTV on raw unimproved land. Once all the horizontal work is done (water / power / sewer lines in, grade established, road improvements) then you go vertical. Once you are at vertical, the lender will go to 70-90% of LTC or loan to cost based on the max. loan being 70-75% of ARV or after repair value. So comps will need to be pulled to see what the end value of the units will be and the max. loan will be 70-75% of that number.
Most of my clients will want me to build in an interest reserve, meaning that part of the loan amount covers the monthly interest payments while the construction is being done. If done right, the only out of pocket cost is the cash to close the loan that will be needed. No monthly payments after that up to a certain amount of months. If you stay on track with your proposed build schedule, you can refinance out to a commercial loan with market terms after that.