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Getting a Construction Loan for Investment Property

Because there are so many financing options available to today’s homebuyers and real estate investors, it can be hard to make the right choice. When it comes to upgrading your property, or even building a new one, one option worth considering is construction loans for investment properties.

Renovation or construction loans for investment properties can be used for several projects, but almost always allow the user to customize their space or property. Anyone interested in new construction or a big renovation should investigate this as a viable financing option. Keep reading to learn if these loans are right for you and learn how you can qualify.

What Are Construction Loans?

Construction loans are short-term financing options for new real estate or renovation projects. They are used to pay for the costs of building a new house or for upgrading an existing property. Construction loans are only applicable for the time it takes to complete the project, and users only borrow what they need. These loans are distributed directly to the contractor (instead of the borrower) in segments called “draws.” Draws are marked as certain elements of the project are completed, such as the foundation being poured, or the frame being built.

The main appeal of construction loans is that they enable home buyers or investors to build a new property; though, the freedom to customize a property does come at a cost. For example, construction loans are known to have higher than average interest rates. The structure is typically set up to protect lenders who trust that a project will be completed correctly and that it will be worth a certain amount when done. Homeowners should not rule this option out, however, because there are several perks to this form of financing.

What Can A Construction Loan Be Used For?

A construction loan can be used for several projects, depending on your lenders’ requirements and terms of agreement. Here are a few of the ways to utilize an investment property construction loan:

Purchasing raw land

Pouring foundation

Building an addition to a property

Framing and finishing a house

Building sheds or other structures

Adding a garage

What’s The Difference Between A Construction Loan And A Home Loan?

A construction loan and a home loan are different in terms of what they can be used for; and as such, the approval requirements will be slightly different for each. A construction loan is used to build new structures or renovate existing ones, while a home loan is just a traditional mortgage. Both types of financing will require a credit check and other financial information, but a construction loan will also require the project plans to be approved before the loan is issued.

Additionally, construction loans can only be used for the duration of the project. Home loans, on the other hand, are issued for a set period until they are paid off. Borrowers who rely on construction loans will typically refinance their property after the project is completed and enter a more traditional loan. To do so, homeowners will go through a property inspection and appraisal.

What’s The Difference Between A Construction Loan And A Renovation Loan?

The difference between construction loans and renovation loans lies in the type of project. Construction loans are used for new properties with definitive project plans. Those who use construction loans will also typically transition into a regular mortgage at the end of the construction project. In contrast, renovation loans for investors are used to purchase fixer-uppers or to renovate existing properties. These loans can be used for both cosmetic and structural fixes, like insulating a house or upgrading a kitchen.

Can You Get a Construction Loan For An Investment Property?

Yes. You can get a construction loan for an investment property if your project plans and finances meet designated lender requirements. Unlike some home loans, there is no process stating that a construction loan must be applied to a primary residence. Construction loans can be a great option for financing an investment property for many reasons. Most notably, real estate investors likely have experience working with contractors and supervising renovation projects already. Therefore, they may be well suited to oversee the construction of a new property.

There are also renovation loans for an investment property that can be obtained by following a similar approval process. Investors interested in a renovation construction loan will find that the loan is distributed based on the after-repair value of the property in question. This is where your investor tool kit will come in handy.

How To Qualify For A Construction Loan

To qualify for a construction loan, borrowers must meet several financial requirements in addition to having their project plans approved. To begin, lenders will typically review your debt-to-income ratio and credit. While the specific requirements vary based on your lender, many ask for a credit score of 650 or more. Borrowers must also have a down payment when setting up a construction loan, which should usually be between 20 and 30 percent. Make sure you shop around when searching for a lender; there are numerous options available for obtaining a construction loan and each will come with different requirements.

To get the final approval for a construction or renovation loan, you must also submit the construction plans for the project. Lenders will want to see detailed plans for the property and a team of qualified builders attached to the project. It is important to know that while you do need finished plans for the final loan approval, you can get preapproved for a construction loan before buying a property.

Do I need a licensed contractor to for construction?

Generally, the answer is yes.  The contractor needs to be licensed in the state where you are building the project and carry all of the bonds and insurance.  Additionally, they need to be licensed as a general contractor not specific license. Doing a ‘self-build’ is hard to qualify for a construction loan.  Why?  The main reason is that the contract (licensed ones) is going to stick there neck out when the build the home.  The typically have to ‘guarantee’ the work for several years.  In Arizona, my home state, the guarantee is a blank guarantee for 2 years and a general guarantee for 10 years.  When you self-build, there is no guarantee.

What does a hard money lender look for in a construction loan? 

The number one question is, ‘what are you going to do after the home is completed’?  If you say you are going to live in the home this kills the deal.  It becomes a consumer loan, and typically hard money lenders avoid owner occupied loans.

What Type Of Loan Is Best For Investment Properties?

Three construction loan types are best for investment properties: fix and flip loans, purchase and rehab loans, and construction/purchase and build loans. Typically, investment construction loans are reimbursement loans. In this case, the lender will pay for each stage of construction as it is completed and signed off by inspectors. Let us look at the best types of loans for constructing investment properties:

Fix & Flip Loans: These loans are ideal for the opportunist who has experience in buying, fixing, and reselling properties within a short period. You will find that most conventional lenders and banks will have no problem financing these projects if you comply with common sense hard money underwriting guidelines. What will matter the most for this loan is your experience in effectively flipping properties for-profit and the viability of the project in question.

Purchase & Rehab Loans: These loans are best for purchasing old or outdated properties and either demolishing them to construct a new one or completely remodeling it to fit today’s standards. Again, the underwriting will be the most important thing to get this project started.

Construction Loans/Purchase & Build Loans: These types of loans are available in the purchase of a lot or for construction on an existing lot you own. Construction loans and purchase and build loans are specifically for non-owner-occupied properties with the intent of retail or future rental income.

Summary

The idea of customizing a property from start to finish may seem impossible, both for homeowners and investors. However, this is not the case. With financing options like construction loans for investment properties, building a new property does not have to be a distant dream. While there are approval requirements for this form of financing, it can open new doors to anyone interested in purchasing raw land or fixer-uppers. Consider a construction or renovation loan next time you plan a project; it might lead to amazing results.

Is a lack of funds keeping you from investing in real estate? Do not let it!

How To Find Private Money Lenders Near Me

Many
real estate investors know that buying an
investment property
is different than purchasing a primary residence. Among
the differences is that many homeowners will turn to a conventional mortgage,
while real estate investors often look for alternative forms of financing. That
is why as a real estate investor it is crucial to understand how to fund deals
using resources like private
money lenders
.
In
the real estate industry, a private lender will be a much-valued asset to your
investor toolbox. But what exactly can they do for you as an investor, and how
exactly do they work? Further, how do you approach
private lenders
about a given deal? Read the following to learn how to work
with and find private lenders, so you can help ensure you secure financing for
your next deal with ease.

What Is A Private Money Lender?

A
private lender is someone who uses their capital to finance investments, such
as real estate, and profits from interest paid on the loan. Private lenders
are not affiliated with a bank or other financial institution, and instead
interact directly with the borrower. There are private lending companies that
investors can seek out.
Private
lenders are an asset to investors because they often have different approval
requirements and a faster pace than traditional financing processes. While the
qualifications and interest rates will vary based on the situation, the process
of working with private lenders
will be like other loans.  
2 Ways You Can Use
Private Lender Loans
Private
money lenders can provide a number of benefits for real estate investors, and
the best part is: they can help with almost any aspect of a real estate
investing business. The right financing will vary on a deal by deal basis, but
it is still important to understand each of the options available (and how to
use them). Here are two ways investors
can make use of private money today
:
  1. Refinancing A Property
  2. Buying A New Property

Refinancing A Property

Let
us say you purchase a rental property with a traditional mortgage but want to
negotiate a better interest rate or shorter repayment timeline. Private money
lenders represent the opportunity to refinance, and therefore potentially
reduce the costs associated with funding a deal. Private money is particularly
attractive because in some cases investors can even incentivize potential
lenders with profit shares (rather than loan repayments). For example, when
refinancing a passive income property
investors
could leverage their monthly cash flow to make a deal more
attractive. Private money lenders can represent a much more flexible
refinancing agreement when compared to traditional financing.

Buying A New Property

Private
money loans can be used to help real estate investors purchase new properties,
including residential, commercial, and multifamily real estate. The key to
securing these loans is to run the numbers and craft the right pitch.
Experienced investors may find it helpful to highlight past deals, while first
time investors should instead focus on the potential profitability. Most
investors will agree that it is great to build a relationship with as many
potential private lenders as possible, that way they are ready to meet when a
deal comes along. After all, one of the biggest perks of using private money to
fund a new deal is the quick timeline. Private money can enable investors to
acquire new deals at much faster rates than other lenders.


How To Find Private Lenders For Real Estate

  1. Learn the ins and outs of private real estate loans.
  2. Build a network of potential
    private lenders.
  3. Prepare a strong portfolio to
    present.
  4. Identify the right lender for
    the project.
  5. Wow lenders with your pitch.
When
you are first getting started in real estate, you may look at your colleagues
and wonder how to find private investors for real estate deals. More often than
not, investors are using private real
estate lenders to fund properties
. There are many private lenders out
there, but the most challenging aspect can be to find one that is willing to
fund your deal. However, with the right mindset and preparation, you will be
sure to find private real estate lenders who will want to help you.

Understand The Anatomy Of Private Real Estate Loans

Financing
terms, especially when you are first starting out, can be quite confusing. Are
private lenders the same as hard money lenders? If not, what are the
differences.
Basically,
private lenders refer to individuals not affiliated with a financial institution,
who lend funds to promising investors. Either from a private investor or
someone within your social circle who is decided to invest in your venture.
Hard
money lives in a middle ground between the two. Hard money lenders are usually affiliated
with a more traditional financial institution but have less strict standards.
(This comes at a price: generally higher interest rates.) Though hard money is
technically private money, as an investor you will generally want to
distinguish between the two.
In
addition, it is important to know exactly what kind of information a private
lender will be looking for. In many cases, private
real estate lenders
will have experience investing directly in properties
themselves. Therefore, they will know exactly which numbers and areas to look
at when considering a certain deal. While it is important to build a positive
relationship with a potential lender, be prepared to answer questions about the
facts and figures of a given deal. Here are a few questions to prepare for when
looking for private real estate loans:
  • Will they get their money back?
  • What is the incentive to
    invest?
  • What are the risks involved?
  • How will you secure my
    investment?
  • Is your plan well-researched,
    and it is achievable?

Build A Network

Unlike
securing a loan from a bank—or a hard money lender—working with private lenders
is all about building relationships. This starts with developing a solid
investor network.
It
is a good idea to begin building your network on two fronts. First, get to know
professionals in your industry, such as real estate agents, fellow investors,
title companies, attorneys, and private investors. Many private lenders will
come through referrals within your own real estate network.
Second,
it is a good idea to build your contact list from people outside of the real
estate industry. This includes friends, family, colleagues, and anyone who is
not currently an investor but might be looking for new opportunities. Many
aspiring investors may just be waiting a good opportunity to come around before
getting started. Alternately, some of your friends and colleagues may have
valuable connections outside of your existing network.
Always
approach potential connections with respect and keep these networking tips in mind. Remember, it
will take time to create positive relationships with fellow professionals, but
it will open a lot of doors in your career. Building a strong investment
network is crucial to finding private lenders to work with.

Prepare Your Materials

Put
together the materials that you would be sharing with private lenders during
your pitch.  This includes a company overview, which covers your
education, goals, past deals and experience, and what makes you the right
investor for their funds.
Along
with this information, you will want to prepare a presentation or video that
outlines previous properties you have worked with. This should outline the
success of the past deals, including pictures, numbers and relevant
information. You do not need to include every single property you have
completed, and instead should select the properties that show your best work.
Remember you want to make a good impression and highlight your strengths.
One
more thing to add to your to-do list, which may not be as tangible as a company
overview or introductory video, is to have a clear understanding of the private
investor process. Look into the documents you will need to present to an investor,
such as a promissory note and insurance. Also write out important information
like how long the process will take, when they can expect to see the loan paid
in full and what happens if there are multiple investors. Going in with this
information will ensure you are prepared for any questions that come your way
during the pitch.

Select Your Private Lender

Finding
private lenders might be tough at first, but it is important to keep in mind
that the relationship is a two-way street. Although you will spend time
pitching to potential investors and trying to impress them, you will want to make
sure that the lender you ultimately choose will serve your needs, and not just
the other way around.
First,
make sure to ask them about their proposed loan term and interest rate, and
what the loan will be based on. This will help you find out how long you will
have to pay the loan back, and how quickly it will accrue interest. Further,
you will want to know if they prefer to make their loans based on the
property’s current value, or after-repair value. Be sure to inquire about
potential fees they charge, whether they are upfront or in the form of
penalties. Finally, find out the schedule at which the lender will disperse
their funds to you.
Based
on this information, you will be able to identify which private loan will
present the least amount of risk to you.
Make The Pitch
Finalizing
a deal with a private lender is about far more than explaining the numbers and
going over the property. You need to put your potential partner at ease and
make sure you are both on the same page.
To
establish this rapport, go into your initial pitch meeting focused squarely on
educating them about the process. Keep building that relationship
piece-by-piece. Resist the temptation to go for the quick sale, or fast deal,
it will not work — and it may leave you in worse shape than when you started.
Instead
focus on answering questions, especially those referring to profit splits and
timelines. This is what most private investors are worried. And the more you
can put them at ease by thinking of things from their point of view, the more
likely you are to secure private financing.

Pro Tips For Securing A Private Lender

Private
real estate lenders are not nearly as hard as many new investors make them out
to be. In fact, a great deal of private lending companies is always looking for
investors to lend their money to. The trick, however, is proving that you can
manage their money well. For more of an idea of how to find private money
lenders and convince them you are the right choice, try following these steps:
  • Understand Negotiation Tactics: In securing private money lenders, investors will
    need to learn how to speak their language. That said, there are two
    particular strategies to consider: the hard sell and the soft sell. The
    former, the hard sell, is a more professional approach that will have
    investors develop a convincing elevator pitch. The idea is to sell the
    private money lender on the idea of funding an attractive deal. In this situation,
    it’s important to remember private lenders are just as eager to work with
    investors as investors are to work with them; both parties stand to make
    money on a successful deal. Therefore, investors will want to approach
    lenders with all the necessary information and prove to the lender that
    the numbers are correct. Doing so should convince lenders that they are
    making the right decision. The soft sell, on the other hand, is typically
    reserved for friends and family, and will typically involve an indirect
    approach. More specifically, the soft sell will catch the interest of
    investors by casually slipping an opportunity into a conversation. Either
    way, investors need to know who they are talking to before they begin
    negotiations.
  • Find Lenders Online: Proceed to find lenders using every method
    possible, not the least of which will include online searches. There are several
    online sources designed to connect private money lenders with potential
    investors, all of which may be found with a simple, localized Google
    search. One of the best online searches’ investors may initiate, however,
    is one that looks for local real estate investor meetups. Look for a local
    REI group and find out when they meet next. Attending a local REI meeting
    will connect investors with several industry professionals, many of whom
    may be private money lenders themselves.
  • Cold Call: Investors should try every outlet at their
    disposal, and cold calls are no exception. Simply obtain a list of lenders
    online and begin to call each name. When doing so, be as upfront as
    possible and lay everything out on the table. Proceed to tell them
    everything they will want to hear about the deal and be prepared to answer
    a lot of questions. That said, the initial phone call is more of an
    introduction. Instead of working the deal out on the phone, schedule a
    meeting to go over things in more detail at a later date.
  • Launch A Marketing Campaign: Not unlike looking for a deal, investors should
    market for private money lenders. There are several marketing campaigns to
    consider, but investors shouldn’t limit themselves to just one; try them
    all. A direct mail marketing campaign, for example, will have investors
    soliciting potential lenders through a highly targeted mailing campaign.
    Another idea is to place a sign on any property that is currently being
    worked on. Place a sign in the yard that suggests you are looking for a
    private money lender to fund the next deal, and to inquire within.
Private Money Lenders
FAQ
Working with private
lenders
is not a complex
process, though it can be mysterious for investors who are unfamiliar with alternative
financing methods. As you begin to ask how to find private lenders, make sure
you do not have any lingering confusion about the process. Read through the
following frequently asked questions to make sure when you do find a private
lender to work with, you know what to expect:
How Do Private Lenders
Work?
Private
lenders work by investing their capital into real estate deals in exchange for
interest paid on the loan. They will work with investors to establish the terms
of the loan, which will be paid back according to the term. Private lenders are
often investors in their own right and turn to private lending as a way to
expand their portfolios.
Are Private Lenders
Regulated?
Private
lenders are regulated by state and federal lending laws. Depending on where
they are located, there is often a limit to the number of loans they can
provide without a license. So, while private lenders are not regulated as
strictly as bankers, there are rules they must follow as well. For more
information on the regulations in your state, be sure to research online.
Do Private Money
Lenders Check Credit Scores?
Unlike
their hard money counterparts, private money lenders are not known for checking
borrowers’ credit scores. That is not to say all private money lenders don’t
check credit scores prior to lending, but rather that the decision to loan is
based primarily on the asset at hand. Otherwise known as asset-based lending,
private money lenders will typically base the majority of their decision to
lend on the quality of the subject property. The more likely the property is to
sell for a profit, the more likely a private money lender will be to lend funds
to an investor. Of course, the asset at hand is merely part of the
decision-making process. Many private money lenders will want to know who they
are lending to, which could result in some questions, not the least of which
may include a credit score check. That said, not all private money lenders will
look at a borrower’s credit score. Only those who are more diligent will
typically consider the credit score when lending.
Best Private Lending
Companies
Private
lending companies will offer the same benefits of working directly with a
private lender, though the application and approval structure may look
different. There are many personal loan companies and peer to peer lending
platforms that investors can consider. Here are some of the best private
lending companies out there:
  • LightStream: This outlet offers loans for auto, home
    improvement and just about anything else, at low rates for anyone who may
    demonstrate a propensity for good credit.
  • Upstart: Upstart is an online lending marketplace that
    specializes in personal loans using non-traditional variables to determine
    creditworthiness.
  • LendingClub: LendingClub is a peer-to-peer lending company,
    headquartered in 
    San Francisco, California.
  • Citizens Bank: Citizens Bank offers personal and business
    banking, student loans, home equity products, credit cards, and more.
  • Best Egg: Best Egg is a fast and efficient lending platform
    investor may tap to secure relatively low interest rates.
How Much Do Private
Lenders Charge?
Private
lenders charge different interest amounts ranging from four to 12 percent. The
amount they charge will be dependent on several factors including your
investment history, the numbers of the deal at hand, the proposed term length
and more. However, the good news is that oftentimes the interest rates will be
negotiable. Remember as you practice your pitch that not only are you trying to
secure financing, but also the best loan terms possible.
Summary
Your
goal when working with private money lenders should not be to
simply land a deal and move on. Instead, you should seek out someone you can
present deals to on a long-term basis. If you focus on building a strong
relationship, you can secure financing for both your current and future
investments.
Always
remain professional when building a network, a strong portfolio and a great
pitch can go a long way in landing a deal. By making strong connections and
maintaining positive relationships with each lender you work with, you can help
ensure you always have options when it comes time to finance a deal.
Is a lack of funds keeping you from investing in real estate? Do
not let it!