Why Consider New Construction for Investment Properties

April 27, 2023

The real estate market has been experiencing a steady price rise, making it increasingly challenging for investors to find suitable properties with enough profit margin for fix-n-flip projects.

Further, investors may face difficulties renovating a distressed property due to unanticipated problems concealed within the walls, leading them to allocate even more funds toward a venture that may not yield significant returns. 

For this reason, many sophisticated real estate investors are turning to new construction loans to maximize the profit potential of their projects. 

What Is a New Construction Loan?

A new construction loan is a type of loan that is specifically designed to finance the construction or renovation of a home.

It has a shorter term than traditional mortgages, typically around 12 months. The loan amount depends on the estimated construction project cost, which the borrower provides during the loan application.

What Are the Benefits of Using Private Money New Construction Loans?

One of the most significant benefits of new construction loans is the speed of approval and funding. Private money lenders are typically more flexible and provide financing faster than traditional lenders. This is especially important for new construction projects, where time is of the essence.

Another benefit of using a private money new construction loan is the flexibility in terms and requirements. Private lenders are not bound by the same regulations as traditional lending institutions, allowing them to offer more flexible terms and conditions.

This is particularly helpful for borrowers who may not meet the strict criteria of conventional lenders or who need more customized loan terms to fit their unique situation. 

Qualifications for Private Money New Construction Loans

As mentioned above, private lenders tend to be more flexible in their lending criteria, but they also tend to be more selective in the projects they fund. To qualify for a new construction loan, the borrower must have a solid business plan, a well-defined budget and a clear timeline for completion.

Private lenders may also inspect the builder’s prior experience in real estate development and construction to confirm if the investor has a track record of success in similar projects.

Additionally, lenders want to see that you have a solid exit strategy, such as selling the property or refinancing with a traditional lender once construction is complete.

Once both parties come to an agreement, a term sheet is provided from the lender to the borrower outlining all costs. 

How Are the Funds Distributed

Based on the scope of work of the rehabilitation, the lender’s underwriting department establishes specific timelines for each stage of the project. Upon finishing each phase, the lender lets a third-party inspector assess the property’s status and confirm its completion. 

When it comes to new construction loans, fund distribution is done in a series of draws, also known as progress payments.

These payments are made to the builder or contractor at various project stages as specific milestones are met. This ensures that both parties have the necessary funds to complete the construction while minimizing the lender’s risk. 

Lenders release funds for every project phase through an Automated Clearing House (ACH) system with a Non-Dutch interest – where interest is only charged on funds given.

Who’s the Right Construction Lender for Me

Given the current economic climate, where capital is scarce, and interest rates are escalating, partnering with a well-funded lending institution is crucial to ensure timely and successful project completion.

Longhorn has provided funding for more than 6000 loans since 2008, and many were processed within three to five business days. This is because Longhorn recognizes the importance of closing deals quickly and efficiently in today’s competitive real estate market.

Although new construction loans have some additional requirements that must be met before closing, the same principles of speed, ease of use and a streamlined process remains the cornerstone of our loan product.

Explore the New Construction Loan Product by Longhorn Investments today.