Ask Cornerstone: What is the best way to finance the construction of a single family residence?

Financing a SFR with a construction loan

What’s the best way to finance the construction of a home that I intend to keep as rental property?

I am a real estate broker and found a good deal on the land I purchased (self-funded).  I’m looking to invest in improving the property but I would need financing.

What type of funding is available? My partner and I will be doing the application and we both have excellent credit.

The best source for a small construction loans are usually small, local banks. I recommend to first talk to a bank’s loan officer and to get the requirements in their “Loan Request Package”.  Be thorough with completing the application so the bank will consider your loan.  They typically require a sort of project plan that includes timeline, construction plans, budget, and the general contractor’s information and experience.  Include a market analysis showing that the project would be profitable if you had to sell it at completion. Since you are going to hold the house for investment, you should get prequalified for a take-out loan so that the bank knows how you are going to pay off their construction loan.  This gives the bank the whole picture behind the reason for the loan and helps with risk analysis and mitigation.

If approved, the bank will likely put your loan on a schedule, releasing funds (called draws) according to milestones achieved in your plan, so make it realistic including allowances for weather or resources availability.

I would also talk to a few banks to determine which bank offers the best terms for your situation.  Some banks will require that you pay for all the soft costs out of your pocket. (Preparing and getting plans approved plus paying to pull building permits would be considered a soft cost.) Additionally, banks might require you to cover a percentage of the hard costs. All this depends on local economic environment.

Since you have good credit and own the land free and clear, those pieces will work in your favor.  But because banks consider constructions loans as higher risk, there are many variables that go into their decision making.   While creating your application, impress them with a well written plan to show them your competence. Step outside your application and look at it imagining you are wearing the bank’s hat.  Are there any high risk factors in your plan including contractor experience, land characteristics, or potential permitting pitfall?

Since we, at Cornerstone Company, specialize in private money loans (we are not a bank), I’m speaking to your situation in generalities.   I hope this advice is a good starting point for you.   Best of luck to you on your project.


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