Yes! If you’re using a hard money lender for construction there are a few things to be aware of. First, the good news. Hard money lenders can fund construction projects based on the as-built value. Little City Investments can lend on multi-unit and multi-lot construction projects in Austin and Houston.
We qualify the property, not you, so your credit and income are not really relevant. We base our hard money loans on the property value, not your financial history. Bankruptcy, short sale, foreclosure, sub-500 credit score? No problem. We’re serious.
The bad news? We have to base the amount released at closing on the land value, today, at the 30-day sale price. You may need some up-front cash to do the deal if you’re not getting an excellent value on the land.
Would you invest $52,000 to make $125,000? Not bad, right? Just about a 240% return – and that’s if it takes you a full year. Hard money lenders can be a great source of leverage for construction projects.
Here’s an example.
Let’s say you pick up a lot in central Austin that’s over 7,000 square feet in a neighborhood that allows duplexes. You can build and convert a duplex into 2 condos to sell them separately. You want to use a hard money lender for construction funding.
Purchase price: $200,000
Construction budget: $420,000
Retail for (2) new condos: $900,000
Projected profit: $125,000
*after interest for 1 year, property tax, real estate commissions and 10% contingency on the construction budget
Max hard money loan: $630,000 or 70% of the retail value
Max funding released at closing: $175,000 or 70% of the current, as-is value
What would it take to do this deal with no cash? You’d need to buy it for $148,000. If you can do that, you could do this with no cash at closing.
You’d need some cash to close this example deal, but you could get most of it back during the construction phase. The maximum loan would escrow $455,000 for construction, $35,000 more than your $420,000 budget.
Closing costs to hard money lender: $25,200 (4) points to Little City Investments
Estimated costs allocated in the contract such as: doc prep ($650), title insurance, builders risk policy, survey, closing and recording fees: $2,650
Estimated cash needed at closing: $52,200 (but $35,000 can be reimbursed during construction phase)
Interest payments: $6,825/month
Using hard money for construction projects can be a challenge unless you have one of two things (1) a smoking deal – an acquisition price 30%+ below the current value, or (2) you have some cash to do the deal.
In this example, you’d be looking at using about $52,000 of your own cash (and $630,000 of ours) to make a profit of $125,000.
Doesn’t sound so bad when you put it like that, right? Let us know if you are a real estate investor in Austin or Houston seeking a hard money lender for a construction project.