How Do Commercial Construction Loans Work

Winston Rowe and Associates Commercial Construction Loans With No Upfront Fees

What are construction loans?

A construction loan is a type of bank-issued short-term financing, created for the specific purpose of financing a new home or other real estate project. A traditional mortgage, also called a permanent loan, will help you buy an existing house. However, if you need to build a new house from the ground up, especially if you also need to purchase the raw land, that’s where a construction loan can help.

How do construction loans work?

The loan can be applied for by anyone who is investing their time and money in construction or related expenses. An individual homeowner, a contractor, or a small business owner can use construction loans to finance their construction project. If you already own the land, the equity that you have in that property can be used as your down payment for your construction loan.

Many borrowers ask how a construction loan turns into a mortgage. After the house is complete and the term of the loan ends (usually only one year), the borrower can refinance the construction loan into a permanent mortgage. Alternatively, the borrower can apply for a new loan (often called and “end loan”) to pay off the construction loan.

Does the borrower make monthly payments on a construction loan? Yes, however interest payments on this loan might only be required while the construction project is still underway. Unlike a lump sum loan, construction loans are similar to a line of credit, so interest is based only on the actual amount you borrow to complete each portion of a project rather than all at once. Some construction loans may require the balance to be paid off entirely by the time the project is complete.

More than just for the actual building, a construction loan can also be used to pay for equipment used in construction, building materials, or for hiring employees.

Here are some uses and things to know about construction loans:

New construction: If you are an individual or small business owner who is looking for funding to build a new home for yourself or a client, then you can apply for a short-term construction loan. This type of loan can be used to pay for the construction of new buildings. Construction loans have high-interest rates owing to the risk involved.

Builders or homeowners who want to build custom homes generally look to a construction loan. After completing the project, you can refinance the loan into a mortgage, or you can repay it by taking a new loan from another financial institution.

Expect a big down payment: Construction loans generally require a large down payment of around 20-25% of the total cost of the project, usually the cost of construction and mortgage.

Thorough application process: When you apply for a construction loan, you’ll be asked to provide the details of your construction project, including like the total amount of funding required, details about the builder, a detailed project timeline, the floor plans or construction drawings, the cost of materials, and the cost of labor.. (We’ll talk about applying for a construction loan in more detail later.)

Look out for paperwork: Until recently, it was hard to find lenders offering construction loans online. If you know you want to apply for a construction loan, you might find it easiest to visit your local bank or regional credit unions and ask for information in person. These institutes will be aware of the local property and construction market, and should be able to help you create a plan for your application.

Types of construction loans

Construction Mortgage Loans: This is a loan you can use to finance the purchase of land, or construction of a home on land you already own. These loans are usually structured so that the lender pays a percentage of the completion costs and you, the builder or developer, pay the rest.

During construction, the lender will release your funds in a series of payments, called “draws.” Typically, the lender will require an inspection between draws to check that the project is proceeding as planned. As the borrower, you are responsible for paying interest on the amount of funds you use.

This is different from a term loan, where you get a lump sum payment at once, and then pay back interest on the whole amount. Once your construction is complete and your interest paid, you’re responsible for repaying the entire loan amount by the due date. Generally, construction loans have short terms because they reflect the amount of time it would take to build the project; a year-long term is common.

Construction-to-Permanent Loans: Also called the CP loan, construction-to-permanent loans are another option for financing the building of a new home. CP loans offer some extra convenience to borrowers by combining two types of loans in a single process.

During construction, if you have a construction-to-permanent loan, you only pay interest on the outstanding balance, at an adjustable rate determined by the lender and pegged to the prime rate. The prime rate is a widely-used benchmark based on the federal funds rate, which is set by the Federal Reserve, meaning that if the Fed raises rates, then the interest rate on your construction-to-permanent loan will rise, too.

When the construction phase is over, the C2P loan converts into a standard 15- or 30 year mortgage where you pay principal and interest.

An advantage of construction-to-permanent loans for small business owners and homeowners is that instead of having to get a loan for the construction phase and then a second for financing the finished project, you can get two loans at once. In this scenario, you only close once and pay one set of closing costs.

Commercial Construction Loans: If you’re thinking bigger and planning to construct a multi-family home or apartment building, high-rise, multi-unit retail center, commercial office building, or other type of larger project, then you should probably be looking for a commercial construction loan.

Lenders for modern commercial construction loans for apartments and similar big projects are extremely risk-avoidant, and will expect a developer to shoulder most of the risk by covering up to 90% of the cost of the project. If you’re involved with this type of commercial project, you’ll need to be prepared with a lot of cash on hand to fund the construction yourself.

Why get a construction loan?

Purchase Equipment and Materials: You can use a construction loan to buy material and equipment that will be used in the construction of the new home.

Expanding a Company’s Facility: If you are a small business owner with a physical location and you need to build a new office or remodel an existing one, then you can use construction loans to finance your construction project.

Hiring and Training Employees: You can use the funds from a construction loan to hire new employees for construction purposes. You can also finance education and training costs for those employees with your construction loan.

Overcoming Damage or Disaster Expenses: If your office or commercial property is damaged by unforeseen circumstances like an earthquake or other disaster, you can use construction loans to make necessary repairs.

How can you get a construction loan?

Is it harder to qualify for a construction loan? Yes, construction loans are harder to get than a typical mortgage. Most lenders consider construction loans risky (because there is no asset to secure the loan), so you’ll face some stiff requirements if you decide to apply. Here’s what many lenders require for a construction loan:

Down payment: To get a construction loan, you’ll need to make a down payment of 20% or more of the cost of the total project. This means that you will need to be prepared to start the project with your own funds or assets before a lender will agree to loan more. If you already own the land, for example, it’s likely that you will be able to use that toward the down payment amount.

Talk to your lender about this. The particular amount of your down payment will depend on the cost of your project, the land, and what you plan to do with the funds. Lenders require high down payments as a way of making sure you’re invested in the project and won’t vanish if things go wrong during construction.

Strong personal credit: Anytime you apply for a construction loan, you’ll need to provide the lender with your personal credit history–even if you are applying as a small business. The lender will almost definitely want to see your personal FICO score and your business credit history, too.

Financial documents: Typically, a prospective lender will analyze your current and past debt and payment history, as well as any other loans or liens you may have on your property. Whether this loan is for your own home, or for a small business construction project, you’ll be asked to provide financial statements, tax returns, and proof of other assets.

Good reputation: Whether you are the builder, or you are working with a builder, know that the lender will scrutinize the builder’s reputation. Any public information is fair game for making this judgement call: vendor and subcontractor reviews, online reviews, and previous work history.

If you are working with a builder, they should not hesitate to provide evidence of their good reputation, along with the detailed project plans and cost estimates you’ll also need. If you need help finding a qualified builder, check out one of the many National Association of Home Builders chapters closest to you. A trusted local builder with a solid history of successfully completed projects will have an easier time getting a vote of approval from a financial institution in the form of a construction loan.

Specific plans: To qualify for a construction loan, you must have specific and detailed building plans, construction contracts, and cost estimates ready.

Appraisal: It’s challenging to appraise something that does not exist yet! Of course, there are experts who do just that every day. Construction lenders work with appraisers to analyze your project when you apply for a loan. They review the specifications of your construction project and compare it with other existing constructions of similar specifications. They then draw conclusions regarding the possible worth of the construction in the future.

It is very important to get a good appraisal to improve your chances of getting a construction loan approved. You can get an independent appraisal if you want, but your lender will most likely insist on conducting their own.

How do you qualify for an FHA construction loan?

If you have less-than-perfect credit, you may qualify for a construction loan backed by the Federal Housing Administration. FHA construction loans have lower qualification minimums than most banks. As of October, 2020, these FHA requirements were: FICO® score at least 580 = 3.5% down payment FICO® score between 500 and 579 = 10% down payment MIP (Mortgage Insurance Premium ) is required Debt-to-Income Ratio < 43% The home must be the borrower’s primary residence Steady income and proof of employment

First steps toward construction financing

Before making decisions about your potential construction loan, we recommend that you consider a wide range of options. Banks, online lenders, brokers, and subcontractors can each help you through the difficult and stressful process of completing your construction project. On the other hand, if you choose the wrong partners, they can add delays and complexity.

Here are a few more recommendations for getting started:

Shop Around for the Right Lender: You can look around for a lender that will offer all the options that you need. Some lenders will not provide construction loans while some lenders will provide loans with limited options that you do not need. Check out your local banks and credit unions to learn what type of construction financing they offer, and which options are available to you.

A broker is a professional and expert in construction loans, and an experienced one can save you a lot of hassle. They will understand your requirements, explain to you the best options that you have given your budget, and then shop around for the right lender. They may be able to get you better rates than you can negotiate yourself. Brokers understand the financial side of the construction loan as well as the construction side and both their limitations.

Confirm the Lender’s Experience: This might sound obvious, but make sure to choose a lender with experience in construction financing. If their past experience isn’t clear, you can ask them about past construction projects they’ve financed. You can also ask for references of other developers they have helped.

Tap your network and your local community: If you’re looking for help with a construction loan, look locally. Your personal network is always a good place to look for trustworthy recommendations. If you have a good relationship with a local banker or financial institution, that is also a great place to start.

Which bank is the best for a construction loan?

Your choice of the best bank depends on a number of factors, including your borrower profile, who offers a construction loan in the state where you live, your credit rating, and how much money you have to put down on a construction loan.

Winston Rowe and Associates Commercial Construction Lending With No Upfront Fees.

How To Get A Great Commercial Real Estate Deal

To be a player in commercial real estate, learn to think like a professional. For example, know that commercial property is valued differently than residential property. Income on commercial real estate is directly related to its usable square footage.

Map Out a Plan of Action

Setting parameters is a top priority in a commercial real estate deal get a sense of how much you will pay over the life of the mortgage.

Learn to Recognize a Good Deal

The top real estate pros know a good deal when they see one. What’s their secret? First, they have an exit strategy – the best deals are the ones where you know you can walk away from. It helps to have a sharp,

Key Commercial Real Estate Metrics

The common key metrics to use for when assessing real estate include:

Net Operating Income (NOI)

The NOI of a commercial real estate property is calculated by evaluating the property’s first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.

Cap Rate

A real estate property’s “cap” – or capitalization – rate, is used to calculate the value of income producing properties. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.

Cash on Cash

Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare the first-year performance of competing properties.

Look for Motivated Sellers

Like any business, customers drive real estate. Your job is to find them – specifically those who are ready and eager to sell below market value.

Approach to Evaluate Properties

Be adaptable when searching for great deals. Use the internet, read the classified ads and hire bird dogs to find you the best properties.

Free Business And Real Estate Investing eBooks

Contact Winston Rowe and Associates

Welcome to Winston Rowe and Associates knowledge blog, scroll down to the right for posts about commercial real estate.

This is a list of free books about real estate investing, commercial real estate financing and business strategy.

We’re always on the lookout for great free books so bookmark this blog and check back for monthly updates.

These links are not affiliate marketing links, just publications that we feel may add value to people and businesses.

Commercial Real Estate Finance

The eBook Commercial Real Estate Finance, by Winston Rowe & Associates discusses the fundamentals of the different types of commercial property, the various options that are included with properties and the capabilities that you will have as a commercial property investor.

Real Estate Investing Articles

This is a link to 1226 real estate investing articles written by industry veteran’s.

25 Productivity Tips for Successful Business Owners

Productivity is critical to your success at work. Business owners, managers and executives all want to get the most from their employees. If you’re not performing as efficiently or effectively as others, your long-term job prospects could be in trouble.

Real Estate Investing: How to Find Cash Buyers and Motivated Sellers

“Real Estate Investing: How to Find Cash Buyers and Motivated Sellers” teaches real estate investors and those interested in learning to invest in real estate how to define and target ideal cash buyers and motivated sellers. The book covers absentee owners, rehab investors, Section 8 landlords, and other buyer types. Some of the marketing topics include mailing lists, postcards, both online and offline marketing strategies along with examples. Anyone who wants to wholesale a house or is curious about flipping houses should pick this book to get educated on cash buyers and motivated sellers for their real estate investing.

Real Estate – Breaking Bad How to Flip Decaying Real Estate Properties for Profit

Tired of working 9 to 5? You should think of making money with real estate! Yes, the effort is well worth it! You just have to ditch the misconceptions and embark with all the passion you have in store for this amazing trip of rehabbing old houses and giving them a new look and a new owner.  Your reward? A nice profit!

Real Estate Forms Portfolio

A FREE and ready-for-download eBook consisting of a comprehensive collection of real estate-related forms for real estate investors.

Real Estate Secrets Exposed

This FREE e-Book sheds some light on the often mysterious and sometimes daunting world of real estate.

Use 1031 Real Estate Exchanges to Create Multiple Streams of Income

Discover how to use 1031 tax-free exchanges, tenants in common interests, and zero cash flow properties to create new sources of income. Learn how to offer bundled services and attract new clients. This FREE, ready for download eBook is perfect for anyone involved in real estate, taxes, mortgages, insurance, or law.  Download it now!

Make Money Through Real Estate Renovations

Download this FREE eBook and learn how a successful investor makes thousands of dollars from real estate renovations. Download it now!

Discover the Secrets of How to Fund Your Real Estate Deals with Private Lenders

Download this FREE e-Book, and discover the new secrets of funding real estate deals in the post-bubble real estate market, where traditional lending sources are getting very difficult to obtain. Download it today!

Real Estate Investing Strategy for Rehabs

This eBook is about residential rehabbing and the multiple strategies that can be used to maximize profits in this current economic climate. My goal has always been to share knowledge with folks that are truly interested in rehabbing and view it as not only for monetary gain but also see is as an “art and science” like I do. Happy Rehabbing!!

How to Be A Super Property Investor

A FREE, step-by-step guide that will help you become a super real estate property investor. Learn all the basic and some advanced investing techniques that have generated millions for property investors. Ready for download now!

Financial Terms Dictionary – 100 Most Popular Financial Terms Explained

This practical financial dictionary helps you understand and comprehend more than 100 common financial terms. It was written with an emphasis to quickly grasp the context without using jargon. Every terms is explained in detail with 600 words or more and includes also examples. It is based on common usage as practiced by financial professionals.

The Prince by Niccolò Machiavelli

Niccolò di Bernardo dei Machiavelli was an Italian diplomat, politician, historian, philosopher, writer, playwright and poet of the Renaissance period. He has often been called the father of modern political philosophy and political science.

The Science of Getting Rich by W. D. Wattles

This book is pragmatical, not philosophical; a practical manual, not a treatise upon theories. It is intended for the men and women whose most pressing need is for money; who wish to get rich first, and philosophize afterward. It is for those who have, so far, found neither the time, the means, nor the opportunity to go deeply into the study of metaphysics, but who want results and who are willing to take the conclusions of science as a basis for action, without going into all the processes by which those conclusions were reached.

Sun Tzu Art of War

Written in the fifth century B.C., Suntzu and Wutzu still remain the most celebrated works on war in the literature of China. While the chariot has gone, and weapons have changed, these ancient masters have held their own, since they deal chiefly with the fundamental principles of war, with the influence of politics and human nature on military operations; and they show in a most striking way how unchanging these principles are.

Make Extra Money Flipping Houses While On Vacation by Jason Medley

Reveals his simple and proven systems to automate, delegate and outsource nearly every function of his business except cashing his checks. He shows the exact steps that has allowed him to go on multiple vacations with his family throughout the year while having his system continue to flip houses for him.

Achieving Wealth Through Real Estate: A Definitive Guide To Controlling Your Own Financial Destiny Through a Successful Real Estate Business

Have you ever thought about making money with real estate? In Achieving Wealth Through Real Estate: A Definitive Guide to Controlling Your Own Financial Destiny Through a Successful Real Estate Business, author and entrepreneur Kirill Bensonoff takes you through the process of starting your own real estate business step-by-step, featuring his expert tips and tricks.

Business Loans Uncovered

Knowing if you qualify is one of the most important things to know when applying  for a loan of any type. Blindly applying for a loan and being declined increases the chances of you being declined again and again because you not only lower your credit score each time you apply, multiple inquires also serves a red flag to other lenders and as a result lenders put you in a high risk category and charge higher interest rates in the event of an approval Includes: ​Traditional Lenders, Government Sources, The 7(a) loan guarantee program, SBA Low Doc loan program, SBA Express loan program, Factoring, Venture Capitalists, Angel Investors.

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Real Estate Finance and Investment

This course is an introduction to the most fundamental concepts, principles, analytical methods and tools useful for making investment and finance decisions regarding commercial real estate assets. As the first of a two-course sequence, this course will focus on the basic building blocks and the “micro” level, which pertains to individual properties and deals.

Introduction to the Law of Property, Estate Planning and Insurance

Introduction to the Law of Property, Estate Planning and Insurance is an up-to-date textbook that covers legal issues that students must understand relating to real estate (an especially important business asset), as well as estate planning and insurance.

The text is organized to permit instructors to tailor the materials to their particular approach. The authors take special care to engage students by relating law to everyday events with their clear, concise and readable style.

Defensive Real Estate Investing: 10 Principles for Succeeding Whether Your Market is Up or Down

As the real estate market changes after years of aggressive growth, investors everywhere are faced with uncertainty, wanting to know how to prepare for a potential real estate bust and make sure they don’t lose money.   In his authoritative new work, Defensive Real Estate Investing, bestselling author and real estate expert William Bronchick provides guiding principles to safe investments for beginning to intermediate real estate investors.

Private Real Estate Investment: Data Analysis and Decision Making

Fiduciary responsibilities and related court-imposed liabilities have forced investors to assess market conditions beyond gut level, resulting in the development of sophisticated decision-making tools. Roger Brown’s use of historical real estate data enables him to develop tools for gauging the impact of circumstances on relative risk. His application of higher level statistical modeling to various aspects of real estate makes this book an essential partner in real estate research. Offering tools to enhance decision-making for consumers and researchers in market economies of any country interested in land use and real estate investment, his book will improve real estate market efficiency. With property the world’s biggest asset class, timely data on housing prices just got easier to find and use

Construction Funding: The Process of Real Estate Development, Appraisal, and Finance

Construction firms operate on narrow profit margins and the success of construction projects is hinged upon proper financing. Construction Funding is the only single volume, concise text on the financial aspects of building and developing.

The book acquaints the reader with a set of procedures specifically designed to solve the unique financial challenges facing the construction industry. It guides the reader step-by-step through each phase of financing a development project, from simple one-family residences to large multi-unit complexes. Construction Funding also addresses raising capital, selecting markets, rating sites, insurance, joint ventures, loan options, and cash flow management. Separate sections are devoted to the conduct of profitability studies and to finding after-tax rates of return. Construction Funding, Fourth Edition, has been updated to provide current costs and funding methods and additional learning features such as key terms, review questions, and learning objectives.

How to Make Money With Real Estate Options: Low-Cost, Low-Risk, High-Profit Strategies for Controlling Undervalued Property….Without the Burdens of Ownership!

I have dabbled with real estate for years usually making good money and sometimes being hammered (like with the last crash in the RE market). But overall RE has been good to me. Be that as it may, I have lost enough to know that I wanted to minimize my risk while still having plenty of upside potential. Real estate options are a vehicle to accomplish this goal. Thus, I started educating myself on the subject and found this most excellent book. Mr. Lucier is thorough and detailed and relates the reality of what it takes to profit (not like some of these dream weaver real estate gurus who like to sell you on how “easy” it is).

50 Simple Secrets To Be A Happy Real Estate Investor

Discover the secrets used by successful real estate investors to create happiness in their lives and businesses. Naturally create more happiness for yourself by implementing time-tested secrets to happiness used by other real estate professional and investors just like you. Start to experience more productivity, satisfaction, and success immediately.

Marketing Strategies for Real Estate Photography

One of the biggest problems that real estate photographers have once they have set up their business as a legal entity, obtained all the right equipment and perfected their technique is obtaining new clients.

Clients and customers are the lifeblood of any business, but how do you obtain new clients after starting your business?

By developing and executing a strategic marketing plan tailored to your business.

This short guide has been written to help real estate photographers develop their marketing plan and assist with winning new business.

It includes a series of digital and direct marketing strategies along with useful tips and lessons the author has learned from his own experiences that can save you time and money when growing your business.

A marketing action plan template has been included to help photographers execute the strategies learned in this guide book.

Books by Dr William Edward Deming

William Edwards Deming (October 14, 1900 – December 20, 1993) was an American engineer, statistician, professor, author, lecturer, and management consultant.

Educated initially as an electrical engineer and later specializing in mathematical physics, he helped develop the sampling techniques still used by the U.S. Department of the Census and the Bureau of Labor Statistics.

In his book The New Economics for Industry, Government, and Education Deming championed the work of Walter Shewhart, including statistical process control, operational definitions, and what Deming called the “Shewhart Cycle, which had evolved into Plan-Do-Study-Act (PDSA). That was in response to the growing popularity of PDCA, which Deming viewed as tampering with the meaning of Shewhart’s original work.

Deming is best known for his work in Japan after WWII, particularly his work with the leaders of Japanese industry. That work began in July and August 1950, in Tokyo and at the Hakone Convention Center, when Deming delivered speeches on what he called “Statistical Product Quality Administration”.

Many in Japan credit Deming as one of the inspirations for what has become known as the Japanese post-war economic miracle of 1950 to 1960, when Japan rose from the ashes of war on the road to becoming the second-largest economy in the world through processes partially influenced by the ideas Deming taught