When investing in real estate it can provide a number of benefits but also can be an expensive and risky undertaking, especially in commercial properties. There are ways however to be able to lower the risk while increasing the return through the use of construction loans. Superstition Contracting, an experienced Scottsdale Commercial Construction Company is here to help you navigate through the loan process. This article will hopefully help guide you to find the perfect construction loan best for your project.
Construction loans are used to handle the construction of buildings usually from the ground up. They can also be used to purchase already established properties that are older in ‘need of repair.’ Or maybe the property is under producing for the area these properties are located in. These types of construction loans can include everything from the strip mall that has only a few stores to the apartment complex. That while in a good location, may not be able to keep solidly established renters.
Purchasing older investment properties has some distinct advantages for starters. This allows the investor to purchase the property at a significant discount. This also provides a piece of property that can have a significant amount of leverage using a construction loan in order to purchase the property. Provided the loan being used does not exceed between 75 and 80 percent of the final value of a property. This creates a property that can be purchased with only fifteen to twenty percent of the total cost coming into the investment.
Here is an example; Say there is a property that is a strip mall. It is in a prime location but the asking price is significantly higher than the rent that can be gathered from the property itself at its current condition. The down payment would exceed the amount of the loan for the property would be able to support and create a problem with not much of a benefit. Now let’s say that the property was to be upgraded by a Scottsdale Commercial Construction Company with additional features. This would make the property more valuable and therefore, you would get a better return on the property.
Alternatively, in the case of a strip mall adding larger storefronts to attract slightly larger stores or downsizes to attract a large amount of smaller businesses, then the property’s final stabilized value now increases enough to support the loan necessary to purchase it. In this manner, a construction loan can be used to purchase a property for 75 to 80 percent of its after repair value. Now the investor can improve it, and then either add it to the investment pool or have it re-marketed for sale at a significantly higher value.
How the construction loan process works pre-qualification. The best first step in the construction loan process this helps to determine if a loan amount is within the budget. From there you can get an idea of what the payments will be. This helps the investor figure out what the property will need to take in order to provide, not just the basic monthly payment, but also a return construction loans. These types of construction loans can either be found through local banks. More often than not, you’ll need to apply through national lenders. If an investor has little experience in construction loans, be sure to locate an officer with an extensive background.
Watch out for the following things when applying for a construction loan.
The type of loan chosen would be partially based on what the investor has planned for the property.
Construction phases include soft costs, hard costs, closing costs, inspection fees, reserves, and the final property pay off. Soft costs include permits to ease architectural plans and any engineering fees. These may accompany the property renovation or purchase hard costs.
Hard costs are the actual costs derived from doing the physical construction itself. Closing costs origination blender title and closing fees, and inspection fees. This includes all the funding necessary for each type of inspection that is done on the property. You will want reserves, contingency, and interest payments set aside in case of any emergency, or issues not already factored in that can occur.
Be aware of existing property payoffs. This covers the cost of the property itself for purchase. This is either for the lot and building (depending on the type of commercial property being purchased). Budgeting is highly important in the construction loan process. Payments of the loan are not handed out in a lump-sum but handed out as each a phase of the process is complete. The amount handed out is designed to cover just the expenses for that phase and no more. Receipts, quotes, and estimates are required in order to have the funds released for payment.
Construction loans can be a powerful asset in the hands of an investor. This loan type allows property that would normally be passed over on regular loans due to the necessity of repair, or other reasons that make the property a high risk for the lender. It also allows investors to purchase a property at significant discounts that can be used to upgrade the location with the help of a Scottsdale Commercial Construction Company, and then resell for a significant profit.
Construction loans are based on the final stabilized value of a property and cannot exceed the percentage of that value. However, the down payment is usually significantly lower than other types of properties. This allows an investor to purchase a property that may have; on initial inspection, be outside of their price range. These loans work on any type of commercial property. Whether the investment is in a residential area or in an area that is strictly for commercial businesses. Lower down payments provide the ability to purchase properties in good locations that are underproductive. The possibility of a significantly higher return makes investing in commercial property, by using construction loans a strong tool to consider.
If you’re ready to start investing and renovating, contact Superstition Contracting. With over 40 years as a Scottsdale Commercial Construction Company, we have experience navigating through loans and can offer advice on how to secure a loan for your next project.