Building new SFR investment properties can be a great way to grow your real estate portfolio, but financing such projects can be challenging. One solution to this challenge is a private new construction loan, often referred to as a "hard money loan" which can offer several benefits for investors looking to finance new construction.
Private new construction loans are a type of financing that is secured by real estate. Unlike traditional bank loans, hard money loans are based on the value of the property being used as collateral. These loans are designed for short-term, non-owner occupied projects and offer a quick and flexible solution for real estate investors looking to finance their construction projects.
The Key Benefits of Using Private New Construction Loans
One of the key benefits of using private new construction loans to finance your SFR investment property is that unlike traditional mortgage loans, private new construction loans are designed to cover both the cost of construction and the purchase of the property. This means you can typically secure one new construction loan for both purchase and construction that funds in two or more phases, which means you are only paying interest on the funds that are in use. This flexible approach to new construction financing can be cost-effective for builders who might be waiting for permits and do not need construction funds for several weeks or months.
One of the biggest benefits of private new construction loans for building investment properties is their fast and efficient approval process. Unlike traditional bank loans, which can take months to process, hard money new construction loans can be approved in a matter of days. This makes them a great option for real estate investors who need to secure financing quickly in order to take advantage of a promising investment opportunity.
Another benefit of private new construction loans is that they are typically more flexible than traditional bank loans when it comes to credit and financial history. For example, they may allow investors to borrow more money than they would be able to with a traditional loan. Additionally, since real property serves as collateral on a private new construction loan, these hard money loans are often easier to obtain, even for those with less-than-perfect credit.
It's important to keep in mind that a conventional home loan is typically amortized over 15 or 30 years, but with private new construction loans you will make monthly interest-only payments for a term of six months to two years. Many hard money lenders don't charge penalty fees for early pay off of the loan, so you can pay off the balance as soon as your property sells. Conversely, if your exit strategy hits a bump and you need more time to pay off the loan, many hard money lenders will offer 3 to 6-month extensions for their qualified borrowers. Before choosing a lender, be sure you know if they offer these options.
Choosing a Lending Partner for New Construction Loans
Finally, it's extremely important to perform due diligence when selecting a private lender for your new construction loans. Read our article "Comparing Hard Money Lenders?" to learn more about the critical steps in choosing a lending partner.