Planning your budget carefully is crucial before you start building a new apartment building or renovating an old one. We suggest looking for a “long-term construction loan” that will provide funding for both the building and maintenance phases. A fixed bill is generally what happens. If you need security and stability in the complicated world of growth, this loan is for you.
To make real estate projects more stable and make more money, this blog post focuses on five main reasons why you might want to get a “long-term construction loan.”
In addition to our 30+ years of experience as a Multifamily Lender, our network of over 200 real estate owners and private lenders enables us to help you make informed financial decisions and secure the best terms for your multifamily projects.
What is a Long-Term Construction Loan, and How Does It Differ?
There is a special type of loan called a long-term construction loan that can help finance the construction of a new home or the completion of significant repairs to an existing one. The loan is converted into long-term debt once the building is complete and the house is habitable.
This type of loan only covers the building portion of the property. For a permanent mortgage, you need to fill out a different application and close on it. That method is very different from this one.
A long-term construction loan features a simplified, single-closing process that reduces paperwork, fees, and the risk of interest rate fluctuations between the two stages. As the building progresses, funds are gradually allocated as specific goals are met and confirmed through regular inspections.
Most of the time, people who borrow money only pay interest on the amount they receive, which keeps their cash flow steady. Lenders typically require a good credit score, a low debt-to-income ratio, a solid business plan, thorough construction plans, and pre-leasing commitments for multifamily projects before they will provide a long-term construction loan.
Benefit 1: Streamlined Financing with a Single Closing.
The Efficiency of a “Construction to Permanent Loan”
One great advantage of a “long-term construction loan” is that it facilitates a seamless transition from temporary financing to permanent financing with a single closing. This is the main idea behind “funding construction-to-permanent,” which makes obtaining a loan significantly easier. Picture how easy it would be to build and own a multifamily property for a long time if you only had to deal with one set of papers, one closing date, and one approval process. The process of applying for and getting a loan is no longer needed after “construction is completed.” This can be challenging and time-consuming.
The usual approach is for a borrower to obtain a short-term building loan, complete the project, and then return to the lending market to secure a “conventional mortgage” for long-term financing. There could be a different lender, interest rate, and terms. The application and assessment process may also differ significantly. A construction-to-permanent loan makes it easier to get the money you need to “build a home” (or, in our case, a few properties). This is because there is only one closing. It makes managing things a lot easier, allowing developers to focus on the project itself instead of worrying about complicated financial issues.
Avoiding Duplicate Fees and Hassles
Borrowers save a significant amount of money by avoiding the costs and complications associated with two closings. The single closing method is also easier to use. When you have two loans, you may have to pay two sets of “closing costs.” These can include application fees, screening fees, title insurance, and legal fees. Plus, there are “appraisal fees” that are unique to each loan and add to the cost. The fact that these costs are rolled into one end saves a significant amount of money and has a direct impact on the project’s bottom line.
The renter doesn’t have to pay two sets of fees, which helps them manage their money more effectively. Developers can create more accurate budgets when they know that most financial costs are known ahead of time. Because building isn’t always a sure thing, this predictability helps keep track of project costs and lower financial risks. The single closing of a construction-to-permanent loan is particularly beneficial for any mixed-use real estate project, as it saves money and simplifies the paperwork process.
Benefit 2: Predictable Interest Rates and Budgeting
Locking in Rates Early with a “Permanent Mortgage” Component
One significant advantage of a long-term building loan is that it enables borrowers to secure an interest rate for the permanent part of the loan early on. This lowers the risk that interest rates will change. A lot of “long-term construction loans” are set up so that the interest rate on the “permanent mortgage” part is known from the start, sometimes even before the building begins. In a market that is constantly evolving, this provides you with significant financial security. You can start a building project that will last for years and know exactly how much it will cost to pay off in the end, even if interest rates change.
On the other hand, people often face numerous questions when considering a construction-only loan. Therefore, once the building is completed, the borrower will need to return to the loan market and secure a new loan. Let’s say interest rates rise while the building is being constructed. That could mean “significantly higher interest rates,” which would result in higher monthly payments and potentially make it harder for the project to generate a profit. By locking in rates early on a long-term construction loan, the project is protected from market fluctuations, which is crucial for its financial stability.
Effective Budgeting for “Construction Costs”
An understanding of the long-term interest rate does more than lower risk; it also makes budgeting and spending much more straightforward. Developers can accurately guess the “monthly payments” for the finished property if they know the long-term interest rate. This lets you carefully plan your funds for more than just the “construction costs.” It emphasizes the importance of creating a budget for both the building and loan repayment over time, which encompasses both the principal and interest.
This type of planning enables property owners to determine the long-term profitability of their multifamily projects. To get a better idea of their projected cash flow, return on investment, and break-even points, they need to know how much debt they will have to pay off in the future. Stable interest rates make this all-around budgeting method more straightforward to use. It helps developers make informed decisions, improve their financial situation, and ultimately increase the chances of a successful and profitable real estate project.
Benefit 3: Flexibility in Loan Structure and Repayment
Catering to Various “Types of Loan” Needs
Long-term construction loans are highly flexible, making them a suitable choice for various types of residential and commercial housing projects. You can tailor these loans to meet the needs of your specific project, whether it’s a duplex with one to four units, a five- to ten-unit apartment building, or something much more significant. In the multifamily real estate market, where project scopes and funding needs can fluctuate significantly, this ability to adapt is crucial.
You can get more than just long-term building loans from Multifamily Lender. We recognize that various types of loans may be required at different stages of a project and for other kinds of borrowers. For instance, “bridge loans” can provide you with short-term financing to get through the gaps between loan stages or while the property is being renovated. People often think of “hard money loans” when time is of the essence or when things don’t go as planned. “DSCR loans” (Debt Service Coverage Ratio loans) are ideal for owners who want to focus on cash flow, and most of the time, you don’t even need to provide proof of your income.
“SBA loans” can also have reasonable rates for small businesses that qualify and are building homes. We can ensure that we meet the needs of every apartment project and customer by offering a wide range of goods and services.
Interest-Only Payments During the “Construction Phase”
People who get long-term construction loans benefit because they can make “interest-only payments” during the “construction phase.” In this way, people who borrow money only have to pay back the interest that was added to the loan. At the same time, the property was being built and wasn’t yet generating rent. The financial position is significantly better during a tough time when expenses are high and income is low.
Managing cash flow is crucial during the growth phase, and interest-only payments provide much-needed breathing room. Instead of having to repay the loan’s principal and cover ongoing construction costs, developers can allocate their funds toward more essential expenses, such as building materials, labor, and other necessary costs. This gives you more options, which keeps your cash flow from getting tight. This way, the project can move forward without placing undue financial stress on the team. This will make the whole development process more successful and less stressful.
Benefit 4: Easier Qualification and Refinancing
Streamlined Underwriting for Both Phases
It can be hard to get the money you need for a prominent real estate project. One of the benefits of a long-term building loan is that it may make it easier to get approved. When a long-term building loan is being reviewed, it differs because both the construction and permanent phases are examined simultaneously. This in-depth look at your position makes it easier to qualify than trying to get two separate loans. Lenders examine the entire project to determine if it will be successful, from breaking ground to assessing the steady income the property will generate after completion.
With this all-around method, the loan is generally good for a long time after it’s taken out. Since multifamily lenders have been conducting screenings for 30 years, we can identify and address problems early in the process. You can get approved faster and have a better chance of securing the loan because our banking partners will assess your finances as strong and well-supported.
Future Refinancing Opportunities
A “long-term” construction loan is designed to provide stability and security over an extended period. Obtaining a new loan will also be easy in the future. When the building is completed, the loan converts into a “permanent mortgage,” which means the borrower has a stable loan and an asset that is fully operational and generating income. This stable base may be beneficial if the market improves in the future, such as when interest rates decrease or the borrower’s financial situation improves.
Some people find it easier to secure a better fixed-rate loan after demonstrating their ability to repay a large loan. Keeping your “credit score” and “debt-to-income ratio” in good shape will still be important when it comes to applying for and getting better terms on future loans.
Benefit 5: Ideal for Long-Term Real Estate Investment Strategies
Aligning with “Long-Term” Investment Goals
Individuals who wish to invest in apartment buildings and either “fix and hold” or “fix and rent” them out can opt for long-term construction loans. At the heart of these tactics is buying, renovating, and then managing properties to generate steady rental income over a long period. These business ideas can be backed by “long-term construction loans,” which have fixed monthly payments and extended terms for paying them back. It’s safe for investors to estimate how much cash they will have coming in from rental income, as most of their debt payments will remain unchanged. There is a long-term collection of multifamily “real estate” that you can build if you can plan and keep spending.
Building Equity and Wealth Over Time
In the long run, this kind of loan is a great way to boost your wealth. As the loan is steadily repaid, the equity in the residential investment property grows gradually. At the same time, the property brings in rental income. A strong rental market and good improvements can also significantly increase a house’s value. When market values rise and debt payments decrease, the investor’s net worth increases directly. This makes the multifamily property a valuable and growing asset in their portfolio. You can obtain the funds you need for these significant capital returns and long-term wealth building through long-term building loans.
Conclusion
If investors in multifamily real estate opt for a long-term building loan, they will reap numerous benefits. The steady change of a single close and the known stability of interest rates, along with the flexibility of loan structures, ease of qualification, and a perfect fit with long-term investment strategies like “fix and hold,” make these loans a solid financial foundation.
Let’s say you want to build a house for everyone to share. If you wish to make a new home, undertake a major remodel, or explore other options, please contact Multifamily Lender for a comprehensive consultation. We offer expert advice to help you find the best way to get the money you need as a correspondent or table loan through our extensive network. It’s not enough to just obtain the right funds, such as a well-structured long-term building loan. It’s what you need to do to be successful in the fast-paced multifamily real estate market in the long run.
FAQs
What is the typical down payment required for a long-term construction loan?
There is usually a down payment of 25% to 50% of the total project cost, which includes both the purchase of the land and the construction of the property. This is for a long-term construction loan on multiple properties. To obtain an exact number, you need to know the lender, the borrower’s credit score, the project details, and whether the property is a home or an investment property. Because investment homes are perceived as riskier, they typically require a larger down payment.
Can I use a long-term construction loan to purchase the land for my multifamily project as well?
Most of the time, the cost of buying land can be added to the total loan amount for a long-term building loan. You can often use the land’s value as part of your down payment or input to the project if you already own it. To understand how the land value will be used in the loan, you should talk to your banker about this early on in the process.
What happens if my construction project goes over budget or faces unexpected delays?
Although creating a careful budget is crucial, construction projects can sometimes exceed budget due to delays or unforeseen events. Adding a “just in case” fund to your project budget is a good idea. This fund should account for approximately 10-15% of the total building cost. If costs exceed the budget, you may need to obtain additional funds, such as a different line of credit, or contribute more of your own money. Some lenders may let you change the loan amount, but this isn’t always possible and would require a new evaluation. It’s essential to discuss potential issues with your banker as soon as they arise.
Do I need a licensed general contractor for a long-term construction loan, or can I serve as my builder?
Most long-term lenders will only lend to licensed general contractors with extensive experience, particularly for multifamily projects. This is because the lender wants to ensure that the job will be done correctly and professionally, so they don’t have to worry about it. Most of the time, lenders have a process for approving builders that includes requesting proof of items such as licenses, insurance, and a history of successful projects.
Are there any prepayment penalties if I want to pay off my long-term construction loan early?
Some long-term building loans may have penalties or limits on early repayment, especially when the loan is in the permanent mortgage phase. The purpose of these fees is to compensate the lender for the lost interest income if the loan is paid off early. Before signing the loan agreement, carefully review the terms and discuss any potential early payment penalties with your lender to ensure you understand the implications.
