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REAL ESTATE Construction Loans on Rentals Units

yveskleinsky

Bronze Contributor
Speedway Pass
Jul 26, 2007
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Hi there Easymoney-

Can you go more indepth about construction loans on rentals. ...I had a similar idea today when I was out looking at multi-families. Maybe I could just build one- but then I would have to find the money to float it until it rents. What did/do you do?
 

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EasyMoney_in_NC

Contributor
Sep 9, 2007
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Wilmington NC
Re: Life Altering Choices - Yours?

Sure.
As I understood my individual bank (local) to regard my construction loans. No matter what, they want to get paid. They looked at my loans to build rental homes as a better risk than if I were spec building. I guess they figured it was more likely that I rented quicker than I would have sold the same house (especially if and when market conditions look like they do now, and they did when I started).
Unfortunately with construction loans based on prime, its more expensive to float than it was when I was heavy building. I had one loan (back when the rates were 5.25% const.loan) that I floated for a year and a half or two because it was cheaper than fixed rates (then 6.25-6.5). I knew my banker very well and he just kept extending it for me :D I was making something like 500 a month on a little 1200 square foot ($975 rent) place....it was great!

In general, a loan is a loan, you just have to make sure your lender is on board with what you are doing. Be financially strong....you know all the typical things you need. Find someone that believes in you or what you are doing and make sure they loan off appraisal not cost!!! If you go off cost, you're coming out of pocket, if appraisal, then you use all the banks money. I technically never used my own money. My track record allowed me to get the bank to fund 100% lot purchase and draws based on % complete...easy money :D
Oh and I also have my GC's lic, which in NC is required to build for public consumption. Check where you are.

The banks in general will loan you 80% of appraisal, what you need is for that 80% to be 100% of you totsl costs. Thats why appraisal is so important vs. cost.....very important.
finance 100%, build for 60-70%, refi 80% and take money back at closing, leaving 20% + left. I did it for 5 years and amassed a ton of money and bought other properties doing this. The party is over now because lot prices in my arae have gone insane and rates are high now, but it can still be done with the right #'s.

Hope this helps
 

Wolfgang5150

New Contributor
Aug 15, 2007
70
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Orchard Park, NY
Easy - I have a very familiar background to you, as we were the GC's for building our house (my father also built homes). My question is, when estimating your costs for your projects, how did you factor in the rising costs of lumber and concrete (or other materials)? Obviously to succceed in what you have done, you really had to know your numbers.
Kevin S.
Orchard Park, NY
 

EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
Easy - I have a very familiar background to you, as we were the GC's for building our house (my father also built homes). My question is, when estimating your costs for your projects, how did you factor in the rising costs of lumber and concrete (or other materials)? Obviously to succceed in what you have done, you really had to know your numbers.
Kevin S.
Orchard Park, NY
For the period I built heavy (for me :) ) I kept my fingers on the pulse of materials costs. I have a friend @ Home Depot who headed the construction dept, so he would keep me abreast of the lumber side. And my concrete guy was the same one for the majority of that same time and he kept me in it. I just made sure to beat the hell out of my non regular subs and labor and kept my costs down. When they started getting mad during our negotiations....I knew I had the best price I was going to get. I use the adage "make your money on the buy not the sell" for negotiating labor and materials too. My first 3 rentals I built (had just got back into building after taking a break), I came in 7-8K over in my budget #'s vs. actual costs :hurray: So essentially, I gained 10% per house more, translated into 20k+ more money back to me than I bargained for. I would fully exhaust my const. loan, and then refi to fixed rates and pull out more money (80% Ltv)

The bank was paying me to build houses practically :icon_fU: Then I took their money, and did it again......and again......and again.

I have 2 buildable lots (one second row unobstructed ocean view) and 3 waiting sewer one day, that we own outright from the system above. And for a deal I'm putting together right now, I'll pay off 2 of my smaller mortgages (with previously bank money)to be able to refi the rest to do the deal. So a half dozen properties owned outright (including my personal house) with OPM :thumbsup:
 

Wolfgang5150

New Contributor
Aug 15, 2007
70
12
12
51
Orchard Park, NY
Easy - I like how you think! I have been thinking along parallel lines of what you did, in my area. Currently I have 18 apartments; 1 house & 1 condo (in addition to my home), but been kicking around a scenario similar to yours. As my brother-in-law is an electrician, the other a lawyer, and one relative who does drywall etc, and close friend who is a plumber; I have a good team in place here. I need to look into whether or not I should get a GC license.
Did you do the same house design over & over? (To keep costs down, and refine prices & processes?)
Thanks for taking the time.
Kevin
 

EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
Did you do the same house design over & over? (To keep costs down, and refine prices & processes?)
Thanks for taking the time.
Kevin
I had 2 plans that pretty much did the trick for me. I built an odd ball 2 story and bought another oddball, other than that the rest are variations of each other. I had my per square foot price down to $39 at one point....it was insane !!! They're all the same - slab on grade, vinyl siding 3 bd/2bath/1 garage. A vaulted ceiling here and there, white cabs, vinyl floors and carpet. Psssst and here's the real deal (don't let this out). If you buy the cheapest HVAC system you can (which in my case was Goodman), you can put a 10 year parts and labor warranty for cheaper than a Trane system with half the warranty.:smx9: Works like a champ and has saved me a fortune on a couple of my houses I had some problems with.

You can't buy this kinda info :rofl:
 

Wolfgang5150

New Contributor
Aug 15, 2007
70
12
12
51
Orchard Park, NY
Nice tip. I can picture the houses; not flashy, solid construction, well built - average size for the average person that is a long-term renter.
We may need to have a virtual beer soon and talk shop (and cars)
Kevin
 

EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
The first ones, my wife says they look like manufactured homes :D Its not that bad, but they are quite plain outside.....its inside where they shine. And back when I built them, people were trying to get moved in before the house was even done! After those first ones, I did bump up the exterior facades a bit. One of the plans even has a nice covered porch area across the front. They all range from 1100-1400 feet, I have a 2100 footer and a 1600 (my odd balls), but all the same construction type. They have worked well for me over the years.

These style homes provide for the safest form of a rental. There's no stairs to fall from, no crawl space to mold up, no bricks to break off and cause harm, no lead paint......they're about as idiot proof as could possibly be :D

I could talk $$, houses and cars for ever.......better bring lots of beer :cheers:
 

Wolfgang5150

New Contributor
Aug 15, 2007
70
12
12
51
Orchard Park, NY
Easy - did you buy lots as you find them - or were they all on one piece of land, or neighborhood? Sorry - I ask alot of questions, about topics I am interested in.
Kevin
PS - Do you ever go to Watkins Glen for PCA events?
 

EasyMoney_in_NC

Contributor
Sep 9, 2007
399
31
31
Wilmington NC
No problem, at least they're good questions :)

I bought lots. I bought the "crap" that no one else wanted. I went into 10-20 year old communities (nice, but "older") and bought the one-sie two-sie lots and put up the same sized house as was in the 'hood, but the up dated version. The last stuff I bought, I did develop out of 2 lots (I got a duplex and an SFR on them). See the guys in my area chased the big money, and a lot in an old 'hood didn't pay.......for them. But for me they're worth a couple hundred a month cash-flow and 20-30K each in equity refi (tax free by the way). My saying was even sh*t turns to gold at some point, and for me it turned out to be true. I bought lots in a little 30 home 'hood, one time, at foreclosure. It was me, the attorney (who happened to be my regular closing attorney) and the HOA rep. Guess who bought them? In 30 homes the 'hood had been thru 3 builders/developers. It had a style ahead of its time for the area and each went belly up. I was going to put rentals on them so I didn't care. I started building and all of a sudden, my uncle (who I rarely saw in 30+ years) decided he'd take one. I talked my cousin (his son, btw both live outside the area in DC)into one and I sold the last to one of my tenants daughter. I made a fortune out there because I paid nothing for the lots and they needed nothing.

Now days, lots are at a premium and up until the market died, guys from out of the area were coming in and buying anything they could find. I bought on POS lot for 40k (long twisted story as to why....for another time) and 3 months later, flipped it for 75K and took the money (all cash 1031) and bought my second commercial piece 2 doors down from my 1 piece (just need the middle and I'll have half a block with a 15K traffic count road-front).

I may not have it all worked out on the asset protection side yet, but when it comes to turning crap to gold........thats what I do :D
 

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