A Discussion of Investing in Developments and New Homes
(THIS IS NOT A SOLICITATION FOR INVESTMENT)
Investing in Developments and New Homes
Why would someone want to invest in Land or New Home Construction?
Higher rate of return.
Tangible assets that has value.
Third party management and inspections.
In examining rates of return and risk, investing in Land and New Home Construction Financing is a very solid and safe investment. Let’s look at investing in Land first.
There’s 2 scenarios when investing money with a Developer for Land. The first scenario is for the Acquisition of Land and the second scenario is for the Development of the Land. Or, the Acquisition and Development of the Land. This is called an A&D Loan.
New Home Construction Financing is for the purchase of the lot and the actual cost of construction of the home.
Rates of return for A&D and New Home Financing will consist of a Loan Origination Fee and Interest Rate. These rates vary, but a 1% to 2% Loan Origination fee would be common. Interest rate varies greatly and is dependent not only on the current interest rate being charged by institutional lenders, but on the risk of the project. Current rates are fluctuating between 6% and 9% (New Home Construction Financing is typically lower than an A&D Loan).
There’s no better security for money than real estate.
Unlike intangible items such as stocks and bonds, real estate is…. Real. It’s very simple; if the borrower of the money is unable to pay, the lender repossesses the real estate or home under construction. There is ALWAYS an asset that may be subsequently sold to make the lender whole again.
Stocks and bonds. Just worthless paper.
Another very important consideration is that lending money for Development (Acquisition, Development or Acquisition/Development) or New Home Financing is lending on a tangible asset that is EASY TO VALUE and has a MATURE BUSINESS MODEL.
Whether a new home or land, real estate is easily valued by licensed professionals called Appraisers. An Appraisal is the value of the land or the New Home to be financed. Typically, the amount of the loan is based on a percentage of the total value of the developed land or new home to be financed. This is called a Loan to Value Ratio (known by it’s acronym - LTV). It’s common to have a New Home Construction Loan at 80% of the value of the home when completed. For Land that is to be developed, the LTV is typically 75%.
This difference between the LTV and finished value provides the lender further safety in their investment.
Another safety mechanism in lending on Development or New Home Financing is the Disbursement and Inspection process. Basically, money is initially loaned on the acquisition of the land and then only as construction is completed. Every month, an Independent Inspector goes to the project and verifies that the items have been completed on the Draw Request as the borrower has claimed. This further protects the lender.
In conclusion, lending on Acquisition, Development and New Home Construction Financing provides a TANGIBLE ASSET that is EASY TO VALUE with a LOAN TO VALUE that always creates a safety net for the lender along with LICENSED ENTITIES to VALUE and MANAGE DISBURSEMENTS and PROVIDES A HIGHER RATE OF RETURN THAN ANY OTHER TYPE OF LOW RISK INVESTMENT.
If you would like to know more about investing in Land or New Home Construction Financing, drop us a line. We'd love to further discuss such financing.