Banks remain reluctant to offer funds for new construction loans, especially in the commercial sphere. This makes it difficult for owners and builders who are interested in building commercial, multi-family, multi-use, and residential properties to get the funding they need to turn their visions into reality.
At least it is difficult to get them through traditional banks and financial institutions. This is where private investors come into the picture. As a private investor, you can invest in these properties by offering commercial construction loans.
These loans can provide you with a huge payday while helping these investors make their own dreams realities in the process. Everyone wins.
Why are Construction Loans Attractive to Investors Like You?
One of the best things about private money construction loans, for lenders, is that the loan is repaid, in full, within a few short months. Depending on the scale and scope of the project, the average loan period is between six months and two years. The larger the project, the more time it will take for borrowers to repay the loan.
The other side of this equation is that the longer it takes borrowers to repay the loan, the more money you will earn in interest on the loan.
The other benefit to investors for owner building construction loans and other similar types of loans is that you get to set the terms. While there are some terms that are fairly standard for these types of loans, you have the discretion to make offers based on your own research about the loan and ask for higher interest rates, a larger down payment, assurances that you will be the primary lien holder, and other assurances from the borrower before extending the offer.
Yet another significant benefit is that you are never forced to make an investment that doesn’t feel right to you. In fact, that is something you should never do. Always be willing to walk away from an investment that doesn’t inspire confidence in its success.
Are Commercial Construction Loans the Right Moves for You?
This is a question you’ll have to put a little thought into answering. It isn’t the right option for everyone. There are risks involved. Unless you’re willing to do the work required to minimize those risks, then this probably isn’t the safe investment opportunity it is for many others.
Safe doesn’t mean there are no risks involved. There are always risks when investing. Safe means that your bets are hedged with real property to secure the loan and, hopefully, your due diligence in researching the property, the location, the borrower, and the possibilities the construction project and physical property represent.
You need to understand your own personal risk tolerance before you decide if this is an investment option for you. The more risk averse you are, the better off you might be looking for safer, longer-term investment opportunities. However, you can do the following to limit your risks and make private construction lending a far more palatable option.
- Make sure you’re the primary lien holder. If something goes wrong, you’ll be the first in line to get paid.
- Investigate the security property thoroughly.
- Do your due diligence about the borrower, the property, the location, and the possibilities.
- Make sure you’re comfortable with the terms.
- There’s no shame in walking away from a deal that doesn’t work for you.
When you do these things, construction loans really do promise a substantial payday in a relatively short amount of time. If you’re considering this type of investment, be sure to give us a call and learn how we can help you connect with people eager to borrow, generating a steady stream of income for you.