Acquisition and Development Financing

Acquisition and Development Financing

When most people think of real estate investing, they think of buying homes and commercial buildings they will either rent out or flip and resell for a higher price. However, this isn’t the only type of real estate investing you can choose. In fact, acquiring land and developing it into something businesses can use can be a lucrative way to make money in the field of real estate. This often requires a land development loan, which is typically secured by a mortgage to develop an empty lot of land into something that can be used by companies for a variety of purposes.

What Is Involved

There are a lot of factors when it comes to land development loans. First and foremost, there is the cost of the property that will be purchased and broken up into smaller subsections that will be improved to make room for businesses of all kinds. In addition, there are the hard costs, which refer to the cost of the construction of the buildings that will house the businesses that rent them. These properties are often built in a generic manner so they can be tailored to the needs of a variety of business types. Finally, there are several soft costs that should be included in the lending for this type of real estate investment. These costs include sales commissions, interest reserves and more. Be sure you understand all of the associated costs so you obtain the appropriate amount of funding you require.

Understand the Percentages

If you’ll be working with a hard money lender in Arizona for this type of project, it’s important to understand what you can expect in terms of lending percentages. As a developer, you are likely to be required to put down at least 25 percent of the purchase price of the entire project cost. You will need at least 30 percent of the cost of the land itself. As a general rule of thumb, however, most hard money lenders won’t exceed more than 50 percent of the loan-to-value of refinancing the land. Many reasonable individuals are willing to fund up to 70 percent of this cost as long as the other 30 percent is being paid for in cash. If an investor goes into this project paying for their portion with any other type of loan or with credit toward work that has already been performed, the amount a hard money lender is likely to contribute will fall dramatically. In most cases, it can fall as far 55 percent of the loan-to-value ratio.

Understanding the basics of acquisition, development financing and hard money loans will help you determine if this kind of real estate investing is right for you and prepare you for what you need to make this type of investment happen.

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