There is an option out there for investors looking to grow their portfolio
The following article has been supplied by Nate Zielinski, of RCN Capital.
Over the course of the past few years, there have been a few challenges in the real estate investment industry that have restricted investors from growing their portfolio. Interest rates have risen, and inventory has seen a dip are just a couple hurdles that has made it frustrating for investors.
Investors have had to rely on the properties in their portfolio for cash flow with fix and flips decreasing in availability and long-term rentals harder to secure due to competition and interest rates.
There is another option out there for investors who are determined to grow their portfolio and take advantage of working with a private lender and the diverse programs they have available and that is ground up construction. Ground up construction allows investors to create their own inventory, be architecturally inspired, and most importantly expand their investment portfolio and make more money.
New construction checklist
Although new construction is a very sound strategy when it comes to portfolio expansion, there are a few components every investor must consider when deciding to take a project on. The preliminary work for a ground up construction build is some of the most important an investor can do. There are permits required from a town or city perspective as well as designs or drawings of a floor plan so the construction team can navigate the building process much more efficiently.
This is an important part of the process to get right from a legal perspective. Licensed or certified professionals have to be involved to sign off on and perform demolitions, restore a foundation, install a septic system, complete electrical wiring, etc.
It can seem extensive at times, but with these necessary permits and professionals in place, the rest of the construction project is set up for success. The last component for investors to consider on the front end of a construction project is the cost of the permits, documents and inspections. Adding a little more to the construction budget is a must to cover these costs, once that is taken care of the building process can get underway
Finding the right lender
Another aspect of ensuring successful ground up construction loans for investors is finding the right lender. Private lenders are better equipped to work with investors due to the fact that they typically cater their loan programs to investors’ needs. This is no different when it comes to ground up construction loans.
A lot of lenders out there will provide ground up construction loans, but it is up to the investors to find the right one amongst the variety of options. Investors should always be looking for a private lender with a track record for closing ground up construction loans and a few key components within the loan that sets the investor up for success.
At the top of the list for any investor should be to find a lender that is willing to cover 100% of the rehab budget. This will put an investor in a good spot from day one of the project and give them a concrete budget to work off. Additionally, loan terms are a factor to consider on ground up construction loans. Investors will need at least 18-24 months to finish a construction project so make sure the lender is providing enough time to complete the work while still maintaining quality.
Investors should also be considering some of the guidelines that lenders are putting in place regarding who can qualify for a ground up construction loan. Typically, these are parameters such as FICO score requirements and previous ground up construction experience. While in theory, it is most convenient If the minimum FICO score is as low as possible and there is no prior experience needed, but that should also serve as a red flag to an investor. Lenders that have some form of standards and require experience are the most likely fit for investors.
This way an investor can be sure they are not being taken advantage of. Ground up construction projects can be a massive undertaking so being financially stable and well-prepared from an experience standpoint are good starting points for the investor. Investors with low FICO scores and no ground up experience should consider looking at other investment opportunities and work their way up to ground up construction.
General contractors on speed dial
Enter an investor’s best friend when it comes to ground up construction. For investors, a reliable general contractor can change their career and portfolio. Having someone who can handle pricing, planning and execution of a ground up construction project is a valuable asset and can propel an investor to another level in the industry.
There is obviously an additional cost involved with hiring a general contractor, but the impact they can have on a project is undeniable. Whether it’s negotiating material costs for new siding or electrical wiring expertise for lighting fixtures that can boost the resale value, a general contractor’s value can be on display throughout the construction project.
General contractors can also become extremely motivated by a steady flow of work for themselves or additional workers they employ. If an investor can forge that relationship, they can gain a partner in the form of a general contractor when it comes to all work they need done for their other properties, projects or acquisitions.
Lastly, another benefit worth discussing is that a general contractor creates more free time for investors. Rather than trying to complete repairs or ground up construction projects without the proper experience, investors can trust that a GC will get the job done and as a result will be able to travel to other properties in their portfolio and take care of any issues or inquiries from tenants that are more within their wheelhouse.
Start your next project ASAP
With this process and advice in mind moving forward, ground up construction should be something investors consider as their next project in the industry. By creating inventory, investors can solve a problem that is plaguing the market and set themselves up for success by mastering a new way to create business and expand their portfolio. Get in touch with trusted lenders in your contact book and network with local general contractors to get a leg up on the competition.
