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. Normally 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 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 solid established renters.
Purchasing older investment properties has some distinct advantages for starters. This allows the investor to purchase the property at a significant discount, and also provides a piece of property that can have a significant amount of leverage using a construction loan in order to purchase the property, can mean that provided the loan being used does not exceed between 75 and 80 percent of the final value of a property, creates a property 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, it could be a strip mall or an apartment complex, it is in the 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 the property would be able to support and create a problem and for sure not much of a benefit. Now let’s say that the property was to be upgraded with additional features in the case of residential location it could be new countertops, appliances and perhaps expanding the size of the apartments.
Alternatively in the case of a strip mall adding larger storefronts to attract slightly larger stores or downsize to attract a number 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, and 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 is the best first step in the construction loan process this helps to determine if a loan amount is within the budget and helps to give an idea of what the payments will be, this helps to figure for the investor what the property will need to make 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 depending on the bank, but more often than not a construction loan can be found through national lenders. If as an investor there has little experience in construction loans be sure to locate an officer with an extensive background to avoid complications.
Watch out for the following things higher interest rates that are locked in from the initial start of the loan processes non-competitive long-term back, in addition to a that, bad customer service experienced lenders who offer a load rate upfront. To find the best offer the best construction loans, the following terms 30-year fixed 15-year fixed one dear arm and then 3 over 1 to 10 / one arm in addition to interest-only loans. The type of loan chosen would be partially based on what the investor has planned for the property, these construction loans are also usually handed out in payments based on the completion of each phase of the construction. Construction phases include soft costs, hard costs, closing costs, inspection fees, reserves, and the final property pay off. Soft costs, these costs include permits to ease architectural plans and any engineering fees which may accompany the property renovation or purchase hard costs. These are the actual costs derived from doing the physical construction itself, while closing costs origination blender, title and closing fees, 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.
Existing property pay offs, 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, and budgeting is highly important in the construction loan process, because 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 prepared or to upgrade the location, 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, allowing an investor to purchase a property which may have; on initial inspection, be outside of the investors’ price range. These loans work on any type of commercial property whether the investment is in residential areas or in areas that are strictly for commercial businesses. Lower down payments provide the ability to purchase properties in good locations that are underproductive, and the possibility of a significantly higher return makes investing in commercial property, by using construction loans a strong tool to consider.