Best bet to secure financing for a new build rentals?

Question

I know it's been discussed at length, but I'm looking for more insight with regards to the business model that I'm considering. Here's the set up and the items that I think I have checked off:

1- I've made my living as a custom home builder for the last decade, so I'm confident that I can build townhouses/duplexes on infill lots. I already have my list of subs and suppliers that I've dealt with for years, so the construction piece is taken care of. Heck, that's the easy part.

2- I'm in central Indiana, so there's an abundance of affordable infill lots that I can get my hands on.

3- I have a few sets of building plans that I've put budgets together for, so I know what my build costs are versus what I can get in monthly rent. The margins are there and they actually look really good.

4- I have the property management piece covered as I've owned and managed several rentals in the past.

5- I have an LLC set up that is almost a decade old. I have accounts with my suppliers and access to small lines of credit with the local savings and loan.

All of this sounds good, right? Here's what I'm struggling with: The banks might let me do one or two of these , but that's not going to get me to where I want to be with this model. What's my best bet for securing the financing to a) do the builds and b) hold on to them long term?

Brad Brosmer · Answer

If you are building them right (cost and design), you should be able to get 20% equity upon appraisal and closing. When we build MF, I do construction loans for the actual build process, but when I go through the final closing, my appraisal value provides me with the 20% equity, or 80% LTV number that I need. Therefore, I can typically build them for no money out of my pocket. I do take other properties as collateral through the build process as they want something from me if things would go sour during construction. But if you have equity in other properties, you should be able to collateralize those to an extent, especially for small builds like duplexes.

You would want to find a lender that is REI friendly to be able to do this. I have a local bank and forged a relationship with them so that that trust is there to do these types of things. I'm sure if you've been in business for a while, you should be able to find someone similar.

Also want to point out that this process may be a little easier for more units than a duplex. I've found that the more units you have, the easier it is to make the numbers work.

William Hiday · Answer

Thanks for the reply, Brad.

I'm familiar with and have used the traditional route of having the local bank finance the construction loan and then roll it into a perm loan on several projects in the past. I have traditionally purchased the land/lot with cash and that was my 20% equity on the project. My frustration with the bank is a) that their process is extremely slow and cumbersome and b) they are very, very conservative with their terms. Ex: They'll only do a 15yr loan on investment property and not a 20yr or 30yr loan. As you know, this one will wreck your numbers right off the bat!

I guess what I was fishing for in my initial post was this: Is there any investor or investor type out there that would an appetite for longer-term strategies like what I'm talking about?

Best bet to secure financing for a new build rentals?

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