Rehab Projects: Understanding Construction Loans
When you are rehabilitating a commercial property, often it is not possible to obtain long-term funding right away, because the property is not developed enough to be worth the value of the final construction yet, making it impossible for financing to be underwritten. When that happens, banks and other lending institutions typically work with those planning rehab projects to create a tiered funding system that includes both short-term loans that finance the construction and also longer-term loans that support the project through establishing its market level of occupancy.
This allows the lender to control risks by making sure that the property rehabilitation is moving forward along a sensible timeline. They do this by having go/no-go limits and milestones that provide access to other forms of funding, allowing for the transition from construction loans to long-term loans as various phases of the project reach completion. For those who are looking to make rehabilitation into an investment property, understanding those milestones and being sure that the construction proceeds on pace to obtain the right funding at the right times is key.
Rehab projects are not easy to manage, but they do allow investors to increase the earning potential of properties many times over. The key in getting approved for the right construction loan for those projects is to go in with a clear plan, and that means knowing your budgets up front. That way, you are able to ask for the right funding when you apply for the shorter-term portion of the loan. Nothing slows down a real estate project quite like having a cash flow crunch, after all.
Properly managed, these loans are the key to turning dilapidated properties around and revitalizing entire city blocks, because once they are stabilized into long-term loans and the properties reach market level, they perform much like traditional commercial real estate loans, allowing for easy management and for industry-standard expense calculations as the property hits its mature investment phase.
When the time comes for your next round of rehab projects, remember to approach the first round of funding with the idea that you don’t just need to fund the property, you also need to finance the work that’s being done to it. That way, you can be sure to take out everything you need to get the work done and get tenants into your building quickly. After all, when it comes to reaping a return on any investment, your turn-around time to dividends is the most important thing.