Purchase Commercial Properties With Construction Loans

Investing in real estate provides a number of benefits but also can be an expensive and risky undertaking especially in commercial properties. There are ways however, to be able to lower the risk while increasing the return through the use of construction loans.

Normally, construction loans are used to handle the construction of buildings usually from the ground up. They can also be used to purchase already established properties that are older, in need of repair or may be under producing for the area. These properties can include everything from the strip mall that has only a few stores to the apartment complex that while in a good location may not be able to keep solid, established renters.

Purchasing older investment properties has some distinct advantages. For starters it allows the investor to purchase the property at a significant discount. It also provides a piece of property that can have a significant amount of leverage. Using a construction loan in order to purchase the property means that, provided the loan being used does not exceed between seventy-five and eighty percent of the final value of the property, a property can be purchased with only fifteen to twenty percent of the total cost coming into the investment.

Here is an example:

There is a property. It could be a strip mall or an apartment complex. It is in a prime location but the asking price is significantly higher than the rent that can be gathered from the property itself at its current condition. The down payment would exceed the amount of the loan the property would be able to support. Now, let’s say that the property were to be upgraded with additional features; in the case of residential location it could be new countertops, appliances and perhaps expanding the size of the apartments. Alternatively, in the case of a strip mall, adding larger store fronts to attract slightly larger stores or down size to attract a number of smaller businesses, than the property’s final stabilized value now increases enough to support the loan necessary to purchase it.

In this manner a construction loan can be used to purchase a property for seventy-five to eighty percent of its “after repair value” know and ARV. The investor can improve it and then either add it to the investment pool, or have it remarketed for sale at a significantly higher value.

How the construction loan process works:

Pre qualification is the best first step in the construction loan process. This helps to determine if the loan amount is within the budget, and helps to give an idea of what the payments will be. This helps to figure for the investor what the property will need to make in order to provide not just the basic monthly payment but also a return.

Construction loans can either be found through local banks, depending on the bank but more often than not, a construction loan can be found through national lenders. If as an investor there is little experience in construction loans, be sure to locate an officer with extensive background to avoid complications. Watch out for the following things; higher interest rates that are locked in from the initial start of the loan processes, non competitive long term lock in addition to a fee, bad customer service. Experienced lenders who offer a low rate upfront offer the best construction loans.

Construction loans can be found in the following terms, 30 year fixed, 15 year fixed, 1 year ARM and then 3/1 to 10/1 ARM in addition to interest only loans. The type of loan chosen would be partially based on what the investor has planned for the property.

Construction loans are also usually handed out in payments based on the completion of each phase of the construction.

Constructions phases include, soft costs, hard costs, closing costs, inspection fees, reserves, and the final property pay off.

Soft costs – these costs include permit fees, architectural plans, and any engineering fees, which may accompany the property renovation or purchase.

Hard costs – these are the actual costs derived from doing the physical construction itself.

Closing costs – Origination, lender, title, and closing fees.

Inspection fees – this includes all the funding necessary for each type of inspection that is done on the property.

Reserves – contingency and interest payments set aside in case any emergency or issues not already factored in occur

Existing property pay off – this covers the cost of the property itself for purchase. This is either for the lot, or the lot and building depending on the type of commercial property being purchased.

Budgeting is highly important in the construction loan process because payments of the loan are not handed out in lump sum but handed out, as each phase of the process is complete. The amount handed out is designed to cover just the expenses for that phase and no more. Receipts, quotes and estimates are required in order to have the funds released for payment.

Construction loans can be a powerful asset in the hands of an investor. This loan type allows property that would normally be passed over on regular loans due to the necessity of repair or other reason that makes the property a high risk for the lender. It also allows investors to purchase the property at significant discounts, repair or upgrade the location and then resell for a significant profit.

Construction loans are based on the final stabilized value of the property and cannot exceed a percentage of that value. However, the down payment is usually significantly lower than on other types of properties allowing an investor to purchase property, which may have on initial inspection, been outside of the investor’s price range.

These loans work on any type of commercial property, whether the investment is in residential facilities or in facilities that are strictly for commercial businesses. Lower down payments, the ability to purchase properties in good locations that are under productive, and the possibility of a significantly higher return makes investing in commercial property, by using construction loans, a strong tool to consider.