EXPLAINED: Construction Financing on a Rental Property

What kind of financing is in play when you're looking to build on an infill lot? Steve, Chase, and Sherida discuss different options and strategies to get your project off the ground.

Watch the full episode here: https://youtu.be/35TsebUJ7gY

One of the terms we want to go over and define is A&D money (Acquisition and development money or capital).

And that's a specific kind of loan that banks definitely do, right? Well, if a builder needs money to buy land, and develop it and get it all, all the way to permit, right, that's an A&D loan. And banks can and can do that.

But if you're new, and you're going to go and say, I need A&D money, I need $4 million for this 20-acre piece. You're not getting that loan, you typically have to have a relationship with that bank and a track record before they're willing to cough up some end money. And beyond that you need to go, you need to go hard money.

Chase Leavitt

Or you might need to have some cash in the bank or some assets.

Steve Olson

They want to see that, they want that risk to go away and know that they're well collateralized.

A&D money, these guys just do it for vertical. Private investors come to them and say, Here's $300,000 from my IRA, and then the fund goes out and finds builders that have land that's ready to go and they need capital to go vertical with, right, so you could find a company like that. The specializes in vertical financing.

That vertical financing is going to be more expensive. Why would somebody go the more expensive route, then? Why don't they just go down to "First Bank of Arizona"?

Sherida Zenger

Usually, it's because they don't have the funds behind it to back it.

Steve Olson

The terms at the bank are better, but the qualifications are much more stringent. Is that what you're saying? Yeah.

Sherida Zenger

There's no way they're going to qualify. So if I know that, hey, I could go get some hard money. Because some of these hard money people are going to, or a fund, if you will, they're going to be more willing to loan to you knowing they're in the first position because they can take over the piece of dirt or land, whatever you're trying to develop, right?

Some of these banks, they're not in that market to go do that. They don't want to do that. But yeah, they're the qualifications are going to be a lot higher and more stringent.

Steve Olson

They're gonna ask you a lot of stupid questions, go through all your paperwork. And I would add, though, that the hard money is gonna still ask a lot of those questions 100%. But they can typically move a lot faster, you know, a bank is gonna, I mean, they can't go to the bathroom in less than 30 days, let alone do an A&D loan.

Like when we do our stuff for FIG, the fourplex Investment Group, Aaron in our company has a whole bunch of individuals he goes to and he created a fund that only loans money on a big deal, right. And the way that that gets handled is they record a mortgage against the entire property. And then when our investors come in and start closing on fourplexes, that A&D capital gradually gets paid down until it's paid off.

And that's a great way to minimize the capital that we have to have into the deal. But once again, a normal bank that's not going to fly, they're gonna want to see equity in the deal, right? So there are creative ways to do it.