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Most real estate investors start out buying and flipping or renting residential homes to begin with—but when you hit the big time, it might be time to start buying raw land and building bigger construction, like residential subdivisions. Overseeing a project of this magnitude is not for the faint of heart, if you’re ready, we can help.
Construction financing for builders is a little different than if you were trying to simply buy a pre-built home. You’ll still need to convince a lender that you’re a “good risk” and that their money will be paid back eventually, but for the most part, this is nothing that you haven’t seen before. Here’s what you need to know to make your residential subdivision project successful.
So, before we dive into the realities of construction financing, if you want to get a detailed plan for you specific investments, click the link below for a free strategy call today.
Pick one: equity or debt
As you know by now, you can either finance a project with equity or debt, and most often both. Most real estate investors won’t have the capital to finance a residential subdivision on their own, so they’ll need the help of lenders or other investors. Plus, most lenders are loathe to loan 100 per cent of any project.
One of the best ways to ensure that you get the best construction financing for your residential subdivision is to have a relationship with multiple lenders. Interest rates can be unpredictable, so being able to talk to multiple lenders over the course of your project may help you get the lowest rate and best terms possible.
What’s your investment strategy?
Before you get construction financing, you’ll need to know the answers to some big questions. As you know, the success of your subdivision will depend on a number of things.
Can you get the appropriate permits and zoning? First and foremost, will you be allowed to not only purchase this land, but build the type of construction you want upon it? If not, your residential subdivision may be dead on arrival. One way to determine whether this is likely is to meet with firms that specialize in obtaining permits and zoning permissions. They’ll let you know whether they think it’s possible to get what you need—and they’ll give you the time frame in which it can be done.
What’s your Plan B if there are construction delays? If something delays construction, you’ll need a financial Plan B to keep it going while times are tough. After COVID-19, we’ve seen firsthand what can happen to even the best-planned projects—make sure you account for global acts of God when you’re considering construction financing.
What happens if the competition drives down unit price? A global pandemic isn’t the only thing that can stall progress. What happens if your rival developers start building a cheaper subdivision nearby? You need an investment strategy to account for these possibilities.
What’s the Plan B if government and political factors affect your subdivision? Finally, it’s important that you have some backup plans in mind if your local government suddenly decides that they’re no longer in support of residential subdivisions, or it becomes less than prudent for other political reasons to build in your area. This doesn’t happen often, but having an exit strategy will ensure that your investment doesn’t go to waste.
Discover How To Develop Real Estate With This Step By Step Guide
Residential subdivision construction financing
A subdivision land development loan may be your best bet as a residential subdivision developer. They’ll finance everything from purchasing raw land to developing the land and actually building residential homes upon it. Your entitlement costs will be covered—that is, paying for electricity, sewer, gas and water to run to the land.
However, before you run to get a residential subdivision land development loan, bear in mind that they will often require hefty down payments. These loans will have lower rates than those for already-developed land that generates cash flow, but that’s made up for by your larger down payment. In other words, before you start a subdivision project, make sure that you have investors who can help you get the money together.
What happens if my loan runs out during construction?
Even with the best financial plan possible, there are always unexpected issues like the ones named above. Luckily, your land value will increase during the construction process. If you find yourself low on development cash, keep in mind that you can always get a second mortgage using the land itself as leverage. Just make sure that you don’t take out more money than you can reasonably get back when you sell the subdivided plots and houses. This means calculating whether housing prices are expected to rise or fall in the coming months, and planning accordingly.
Other financing options
Sometimes a residential developer will come across a deal that’s too good to pass up, and needs to be acted upon quickly. In that case, they might decide to purchase the land with cash, then take out a construction loan which uses the land as collateral.
Alternatively, a hard money land development loan may be the right way to get your next project started. This often pay enough for a big down payment; then you can get a cash-out refinance to handle the rest of the project. As always, make sure that you understand the terms of these construction financing options before you sign on the dotted line. Quick cash usually comes with hefty fines and fees if you can’t pay back the loan on time. Your real estate agent and attorney can help you better understand the terms and conditions—and what might happen if you’re left in the lurch.
New Construction Financing for Builders – A recommended lender
LendCity is a Mortgage Brokerage helping builders and developers across Canada turn their building desires from drawings into reality.
When dealing with LendCity they will listen and understand your needs, then shop all the lenders that would support your potential build, securing the best rates, lowest fees and most favorable terms with the least amount of money in the project.
How to contact LendCity for your constuction financing;
- Email Mike Peters at email@example.com
- Call the office at 1-519-960-0370
- Visit LendCity online at Lendcity.ca
- Click the link below for a free strategy call
Is a residential subdivision right for you?
Construction financing for residential subdivisions goes smoothly when you already have a significant amount of capital available, and don’t need to rely on lenders quite so much. If you do finance a subdivision development, make sure that you take all factors into account. As we know, the world—and the real estate market—can change rapidly. Make sure you have a Plan B, C and maybe even D to ensure that your subdivision gets the best returns possible.