Banks, lenders, & loans

Many developers take out loans to finance their projects without taking into account the multitude of factors that affect loan repayment. In this blog, we will discuss the different types of construction loans and what factors to consider before taking out a loan.

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Purpose of Loans

All developers have different financial situations that will influence how they finance their projects. Some developers may choose to use all cash, while others decide to take out a loan. While it seems unlikely, loans do have certain benefits over cash investments. With a loan, you have less liability in comparison to a cash investment. A cash investments puts all your eggs in one basket, while a loan provides more flexibility in case their is an issue that arises during development. Banks will also vet any partners involved in your project before approving them for a loan, ensuring that you are working with someone who can uphold their end of the bargain. If you decide to finance your project by taking out a loan, consider the different types of lenders and the terms and conditions of different loans to pick the one that is best suited for your financial needs.

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Types of Lenders

Banks

The most traditional option for a developer is to take out a loan from the bank. Banks may offer fixed or adjustable rate construction loans, and may require collateral such as real estate or other assets to secure the loan. Small, local banks are usually the best places to look.

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Credit Unions

Credit unions are non-profit financial institutions that offer a variety of loan products, including construction loans. They offer competitive interest rates and are ideal for smaller projects. They also have more flexible underwriting standards than banks.

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Online Lenders

These are financial technology companies that offer construction loans through an online platform. They offer competitive interest rates and can have a more streamlined loan process compared to traditional lenders.

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Hard Money Lenders

These lenders are private individuals or companies that lend money secured by real estate, usually on a one year loan. Loans from them can be used for construction projects but typically have higher interest rates and shorter repayment terms. Hard money lenders are good options for developers who feel they’re not financially ready and are unlikely to secure a more traditional loan.

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Private Lenders

Private lenders are individuals or companies that lend money for construction projects. They may offer more flexible loan terms and may be willing to lend to borrowers with less-than-perfect credit.

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Choosing a Bank or Lender to Work With

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Choosing which bank/lender to take out a loan from is just as important as choosing the right type of loan. Begin researching early and consider which banks will be open to working with you, if your project is something they would consider lending for, and what documentation they will need from you. The most important factor to consider is which bank you see yourself building a long term relationship with. You will likely reuse their services for future projects so having a strong relationship with your bank/lender will be they key to the success of your projects. Getting in touch with the VP of lending and having an initial discussion about their lending process will help you build that relationship that will ultimately decide whether that bank is right for you.

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Key Factors Banks Consider

Before any lender offers you a loan, there are many factors they will consider. The first is your credit history- banks want to assess your creditworthiness and financial stability. Banks may require collateral to secure the loan itself. They will also examine your debt-to-income ratio and financial strength to ensure you are capable of repaying the loan, the construction plans and budget to verify the project is realistic and feasible, and your experience/track record. Lastly, they may consider market conditions like the local real estate market to assess the risk associated with the loan.

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Getting the right loan from a trusted lender is critical to making a smart investment. If you’re interested in learning how else to build the credibility of your investments, join me and my team at Flex Space Untapped where you can learn the inside tips and tricks that made me the King of Flex.