Ground-Up Construction a Smart Investment Move

The millennials have all grown up (the older ones are flirting with their 40s) and are officially breaking away from the “renter generation” label that’s hounded them for years. The housing market reality is that supply cannot keep up with demand. In fact, studies are showing that “single-family home construction has been rising steadily since it bottomed in 2009 during the Great Recession.”

For real estate investors and lenders alike, this could mean yet another opportunity for which to expand portfolios. Enter ground-up construction loans. Whether developing a property from scratch or tearing down an existing structure to re-build on the lot, ground-up construction can offer new avenues for investors who are having a hard time with the current state of inventory, as well as the private lenders who want to stretch the boundaries of what they can finance.

How is this different from a property renovation?

The end result may be the same, but the process is vastly different. First and foremost, renovating a property constrains an investor to work with whatever floorplan they’ve bought, whereas opting for a ground-up construction route allows for greater flexibility and planning.

For private lenders like Temple View Capital Funding, LP ("Temple View"), it’s not uncommon for there to be a minimization in red tape throughout the application and approval process where little to no income documentation is often required. Though geared more towards experienced builders or developers rather than first-time investors, ground-up constructions are a significant way for an investor to pave their own road by creating their own opportunity.

How are ground-up projects financed?

For lenders, any project that lands on their desk becomes a risk vs. reward game. Ground-up construction projects carry significant risk (but also reward) due to the nature of how they are developed. There are factors lenders must consider: what industry is the project in; what is the property’s desired use; what type of financing is the investor looking for. These are all determining factors for how far an investor can make it down the lending pipeline and more importantly, what kind of funding they may receive.

Since financing the pre-development steps of a project can be problematic (they are so early in the process that the whole thing can go south at any given time), it’s not uncommon for project sponsors to come out of pocket and fund the early stage until a certain threshold has been passed and there’s a safer guarantee that the project will see the finish line.

Things to consider with ground-up construction loans

Both lenders and investors have to be on the same page with project goals, understanding the aspects of planning from beginning to end. For lenders to finance a successful project, it’s critical that they understand the project goals and client needs and have a consistently open (and honest) line of communication with the investor.

Perhaps more than with other types of real estate investments, ground-up constructions thrive most when a true partnership is in place between investor and lender. That’s in part due to the large-scale scope of starting a property from scratch. Things like site planning and zoning, subcontractors, site engineering permitting, and building inspections – to name a few – will impact a project’s timeline and funding.

While there is great flexibility that comes with the opportunity to start with a blank slate, that means there is also great responsibility with running a tight ship. Fostering collaboration and engagement between all participating parties will not only better ensure that the project will be finished in a timely manner, but also that it could be the start of a long and mutually beneficial relationship.

Ultimately, at a time when there is an ever-growing demand for single-family homes, it would behoove lenders to strongly consider financing ground-up construction opportunities, as they will open more doors to more long-term financing options. For investors already on the move to find an interested lender, Temple View Capital offers nationwide lending for ground-up construction loans for single-family, 1-4 units, as well as townhomes with competitive rates and terms. To learn more about the terms and opportunities, contact Temple View today.