How New Construction Loans Work – A Guide for Real Estate Investors
Real estate investing is highly competitive, with limited property supply challenging profitable deals. New construction offers investors fewer competitors and the potential for higher returns, but success depends on strategic financing.
While traditional mortgages are common, new construction loans provide greater flexibility for short-term investments. Let’s dive into why real estate investors should be leveraging new construction loans.
How Do New Construction Loans Work?
A new construction loan requires an application and approval, with eligibility based on creditworthiness, a sufficient down payment, and a detailed project plan with a realistic timeline and budget.
If approved for a construction loan for a rental property or residential build, disbursement follows a draw schedule, with funds released in stages such as:
- Foundation
- Framing
- Lock-up
- Completion
A key advantage of construction loans is the option for interest-only payments during the build, reducing initial costs until the property generates income. Upon project completion, the loan may convert to a traditional mortgage or be refinanced into conventional financing.
Tips for Success
Construction loans are short-term loans with high interest rates. While they can be beneficial for the right project and seasoned investor, they can also be challenging to navigate and manage. To succeed with a new construction loan, focus on your bookkeeping and budgeting. Keep detailed records and plans, including a contingency budget estimate.
Cost overruns are common in construction. Without a realistic budget, a borrower can run their project into the red with limited ways to recoup losses or pay down debt. Overruns can happen when borrowers don’t understand the draw process or approve project changes without reviewing the budget.
To avoid common pitfalls, find an experienced team. Your team should include:
- Architects
- Contractors
- Project managers
- Finance professionals
Dominion Financial Services can help you understand the loan process and navigate potential setbacks. We have over two decades of real estate financing experience that can benefit you and your project.
Why Choose Dominion Financial?
We want to help you successfully secure your investment opportunity with a construction loan that specifically caters to your project’s needs. Additionally, with our loan program, you can receive quick approval and then draw funds in as little as three days. We offer:
- Up to 50% of acquisition on entitled land
- Up to 75% of horizontal development cost
- Up to 90% LTC on shovel-ready projects
- Up to 100% vertical construction cost
Ready to get started? Apply now for your personalized construction loan.
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