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Acquisition and Development Financing
Real estate investing, to most people, is buying homes or commercial spaces and renting them out or renovating and reselling for profit. This isn’t the only type of real estate investing option, however. Buying suitable land and developing it into something businesses can use is another worthwhile way to make money in real estate. A process like this typically requires a land development loan which is normally secured by a mortgage to develop a empty land into something appealing to businesses of all kinds.
What Is Involved
Land development loans take a lot of factors into consideration. The cost of the property that’s being purchased and divided into smaller subsections for businesses is the main factor. Additionally, there are the hard costs. These refer to the costs of constructing and developing the buildings that will house future businesses. Projects like this are often built slightly generic so they can be easily tailored to fit requirements for a variety of business types. Finally, there are “soft costs” you’d want included in this type of real estate lending. Soft costs include sales commissions, interest reserves and more. It is crucial that you understand all of the associated costs with property development so that you get the amount of funding your project needs.
Understand the Percentages
If you want to work with a hard money lender for this type of project, it’s important to know what to expect in terms of lending percentages and purchase requirements. Developers are likely to be asked to put down at least 25% of the price of the entire project cost. You’ll need at least 30% of the cost of the land itself for the development of it. Most hard money lenders, however, won’t exceed a requirement from you of more than 50% of the loan-to-value (LTV) of refinancing the land as a general rule-of-thumb. A lot of private investors are willing to provide as much as 70% of this LTV ratio as long as the other 30% is being paid for in cash. The amount of money a hard money lender is willing to give will fall dramatically if an investor goes into a project paying for their portion with any other type of loan or with credit toward work that has already been performed. In most cases, the amount can fall to as low as 55% of the LTV ratio.
Knowing these basics of acquisition and development financing will help you decide if this specific kind of real estate investing is fit for you. That way you can lay the groundwork of what’s need to make this type of investment happen.