Have you heard the latest news? We have a shortage in America like we have never experienced before. Experts have concluded that we need to build as many as five million new single family homes to meet the demand. The millennial generation has matured and is entering the home buying market. As this segment of the population steadily transitions from tenants to homeowners, the current real estate market dynamics are making it challenging for the industry to meet the uptick in housing demand. There is inadequate housing supply in virtually every region across the country. In some markets annual housing starts are off by as much as 70% from their peak before the Great Recession. There is a glimmer of light in some markets as indicated in data from Realtor.com. The show that single-family residence new builds are consistently increasing after they came to a standstill after the 2008 Great Recession.
This housing shortage presents a viable opportunity for both real estate builders and lenders looking to diversify their portfolios via ground-up construction financing. Whether the plan is to acquire raw land and build new properties or demolish preexisting structures, ground-up construction financing offers efficient and flexible capital for investors and builders that are finding it challenging to sources deals when they need to move quick to secure opportunities and be nimble during the current rising interest rate market we are experiencing.
Renovation v. Construction
While the final product may be nearly identical, the ground-up construction process varies significantly from a simple property renovation or typical fix-and-flip investment project. One of the biggest differentiating factors is that a property renovation restricts investors to the existing floor plan. While ground-up construction allows builders flexibility to design the house to maximize its value and meet the characteristics that are desirable in the local market. For example, there may be high demand from home wonders for a master bedroom on the first floor with the other bedrooms on the second floor. This layout is easily achieved when building ground up but if you are buying an existing home to rehab this may not be economically feasible.
Private lenders such as 17th Street Capital offer a streamlined underwriting process that involves minimal red tape and paperwork. While the majority of ground-up construction borrowers are seasoned real estate professionals, lenders are willing to work with new investors that present well-planned projects that have a high potential for success. 17th Street Capital is in the business of making great deals happen. To that end, their team of financial experts are ready and willing to work with savvy investors to develop innovative, efficient funding solutions to accomplish their goals.
Financing Ground-Up Construction Projects
Lenders evaluate each and every deal in terms of potential risk and return on investment. Ground-up construction deals have an inherent elevated risk profile as they have a number of moving parts that can create issues, such as scheduling a high volume of subcontractors, pricing increases and more complicated construction processes compared to a simple rehab. Borrowers will often pay for pre-development expenses such as plans and permits before applying for a loan. It is common that a borrower will be reimbursed for these expenses from the new construction loan so long as the loan to value requirements are met. Some ground-up construction loans will include the acquisition of the land as the first phase of the loan funding. The leverage for the land phase of the loan is typically between 50% – 75% of the land value. Upon the borrower receiving a project approval from the governing city or county, the construction portion of the loan will be funded so construction can commence.
Considerations for Ground Up Construction Financing
Lenders and builders need to be in constant communication at all stages of ground-up construction projects. Transparency is key and will save both parties a great deal of time, money, and energy in the long run. It is essential for lenders to fully understand the project plan and borrower’s needs in order to successfully finance the construction process efficiently. The majority of successful ground-up projects share one common denominator: the lender and builder view each other as partners invested in each other’s mutual success.
There are countless issues that have to be addressed in the process of completing a ground up construction project, from site planning and property zoning issues to obtaining building inspectors and obtaining materials—all of which will influence the overall timeframe and expenses. Establishing and maintaining a collaborative working relationship between the borrower and lender makes navigating these tasks much easier and increases the odds of the project staying on time and budget.
The Time is Now
The numbers don’t lie—a housing shortage exists and the demand is steadily increasing and will continue to do so well into the future. For investors looking to take advantage of this market opportunity, 17th Street Capital offers nationwide lending for ground-up construction from $300k to over $5 million with no income verification. Contact us today to learn more about how we can help you achieve your investment goals!