Transcription
We are back, and today we want to talk about funding the project. We already talked about soft costs on VD1, how to find the right contractor. Now they got the contractor, now they got that position where they got the plans. How do we fund this?
Figuring out your lender is the first step to this, right? So, as you mentioned, you're going to be looking at different options. Private money is going out to friends, family, maybe just private money. You might need them for equity. You might be able to just borrow funds from them at an agreed rate to pay them interest and use their money to build the project. That's one way of funding a project, and it depends how big the project is, right? Right. For example, are you a townhouse site? This thing, it's like a, what is it, what a total cost of construction on this whole thing all together about $5 million? $5 million, right? Unless you got a really rich guy, private funding, right? It'd be hard, you know what I mean? But, you know, you might be able to find private funding for like an ADU or something, right? Right.
So if you can't get private funding, then you got hard money lending, or you got traditional new construction. Yeah. So hard money lending, you know, a lot of guys are going to ask, you know, what is hard, hard money lending mean compared to traditional banks? Well, hard money is similar to private, yeah, because it's not regulated like the banks are. They go out, they get a pool of money together in these hard money groups, and they charge a certain rate and fee to use that money. So you're going to pay a higher rate and a higher fee if you go to a hard money lender. But the advantage is they're not going to have as many restrictions and requirements, right, on you to use that money compared to a traditional, yeah. Right. Right. So for some of you guys, again, don't know, bring company, we actually have our own private springboard funding. We do hard lending for rehab and new construction. Chris and I, when we do new construction, we don't use springboard because we have a lot of good income, we got good credit, we have liquidity, and we have a lot of local traditional banks like Heritage in Seattle, where we do a lot of business with them. And, you know, we get better rates. That's why we use them versus springboard funding. Yeah. Okay. So that's just a little difference between hard money versus traditional.
So let's talk about traditional, cuz that's what we use. Yeah. So traditional banks, those are going to be the big names that every, everybody knows about. You could be talking about US Bank, Bank of America, local community banks like Heritage Bank or Washington Trust, or, you know, lots of different traditional lenders. They're all going to be regulated by FDIC and lots of guidelines. So they've got tighter rules and restrictions on what you can do to get the money. You're going to have to have higher credit scores, cash reserves, things like that. But you're going to pay a cheaper, right, price. Your points and your fees and your interest rate is generally going to be less expensive. There's pros and cons, folks, you know what I mean? You can't get traditional, the next best thing is hard money, right? For us, we have the option, so now we pick the bank.
So what's the requirement now to actually get funding? Yeah. So when you go to that lender, you want to be prepared to bring them an approved set of plans for your project. They're not going to be able to value any project until they know it's been approved by the jurisdiction. So that's number one, get your project approved, permitted. Yep. You want to make sure you have a good credit, credit score. The better your credit score, the better the rates and fees with anybody. So take care of that credit score. You're going to need cash reserves, and they're going to want to show proof of income, a good stream of steady income to get, especially with a traditional lender, especially. That's the key, I want to say. Yes. Traditional lender, hard money is not too concerned about a consistent income, right? But if you want to go traditional, you got to have really good credit. Hard money want to see credit too, but traditional good credit, reserve. Hard money, little bit, you know, less worry about that. Traditional really want to see that consistent income. Yes. Okay. Yes.
If you have a relationship with a bank, it's always good to work and leverage your relationships. We've been working with our lender for a long time, we've got a great track record with them, we've got a great relationship. And any lender is going to want to see experience too. So you want to show them the team that you're assembling, a good contractor, good consultants, good engineers. You show them the team that has good experience doing the type of project you're doing. All of that's going to help you get better prices on your lender. Now, I'm going to say this, good relationship works both with private lending, yep, hard lending, and traditional lending. Yes. When you got good relationship, you do business over and over and over, they will bend the rules some, yep. And they will actually make things a little bit easier in the process of lending money. Yes. They might well bypass certain things. So this is why it's important when you got to find a relationship, work with them more often because sometimes when the deal was tight, yep, they'll bend it for us. Or expiration of loan terms, that's very common. A construction project might run a little bit long, and your one-year loan term is up. If you got a great relationship, they have no problem extending that for you or giving you a really good discounted fee to extend it. That's right.
How does traditional lenders, and we use a lot of them, how do they structure the loan, right? What are the requirements for loan structure? Typically, um, to structure a loan like this, they're going to first send it out to an appraiser. They want to know how much is this project worth as is in its permitted state. But they're also going to look at what is the future value of the completed project. So they're going to look at the after renovation value, the ARV, as it's known, or built without new construction, right? They're going to send that out, they'll get the appraisal. And depending on the size of the project, sometimes the lender can have a discounted, a bulk discount on that appraisal. So you want to be aware of that. If you have eight units like this, what if you can't sell them all quickly, and they take a long time to sell? So they're going to discount the value of that appraisal a little bit, usually 15% is a bulk discount, uh, rate. And that's going to depend on your relationship again with that lender. But they also might be under guidelines and restrictions when they get over a certain number of units. Our lender, for example, usually has a discount, bulk discount at over five units. Over five, that's the key. I was going to say, over five. When you got to do one individual, they don't do this. But when you start doing bigger plats, this is different. Rates like this project we're doing is an 8-unit townhouse. So over five, we have to use a bulk discount, which is almost, in a way, disadvantage. Yeah. But that's why you got to find good deals, folks. Okay.
So then, once you get that appraisal and you get the value of your project, then they're going to take that and they're going to apply a loan to value percentage or and a loan to cost number. And it's different with different lenders. It could be anywhere from 70 to 80% loan to value or 80 to 90% loan to cost. I've seen all those ranges. Okay. Just for around numbers, if you have a million-dollar project and it's a 70% loan to value, they're going to let you borrow $700,000. That's 70% of the value of the project. That's right. That's how that's going to work. So they'll apply those percentages to the project. You're going to want to know what those numbers are because that's critical to know, well, how much equity do I have to put in? That's right. Because everything else is going to be equity beyond what they're willing to lend you for the project. They're going to tell you the terms on points and fees. How much is the fee to get this loan? Generally speaking, a lender is going to charge from 1% to 3% depending on traditional lender, hard money lender, private money. It could probably be in the 1 to 3% range up front when you close that loan. That'll be a percentage fee for that value of that loan. Just use an example, if it's a million-dollar loan, million-dollar loan, 1% is $10,000 at closing. When you get ready to get the concession loan, you got to come to the table with your down payment. That $10,000. Or if it's a three-point, that's $30,000. $30,000. Okay. And when you get the bigger projects, a $5 million project, the number can get pretty big, right?
So you also want to know, well, how much is the money going to cost me as we go? So the interest rate. So they're going to outline that in the structure of the loan and they're going to tell you on a traditional lender, usually it's going to be a variable rate and it's going to float with prime. So they'll use a prime rate, usually following the Wall Street Journal as it's posted in Wall Street Journal. You'll know the prime, prime rate. Currently, the prime rate is about, I think it's about 8 something, maybe 8 and a half. And if you pay, you pay like 1 percentage over prime, for example, that's a good deal. Traditional lenders, we generally get to pay 1% over the prime rate. If the prime rate's eight, we get to pay 9%. Yeah. And right now, you guys, that's the own rate for new construction. This is why a lot of the builders out of business right now because they're paying so much. When the market was relatively good, we was playing one over prime and prime was like probably what, four, four, four and a half, and we're paying five, five and a half. So you see it almost, almost double. But this part of the new construction, this is why there's more risk when you do new construction, and there's more risk when you do bigger projects because there's more money up front and it takes longer to build. So you got to know this game, you got to have a good contractor, you better know good numbers, and you got to have some money to do the construction. Yeah.
So that interest rate, when you go to private money or hard money lending, that interest rate could be whatever they decide. It could be 12, 14, 16%, whatever that lender of private or hard money wants to charge you. So that's another negative of going to the hard money lending. But sometimes you might not have a choice.
So what's the final structure of the loan and all that kind of stuff? We know the points, we know what we're paying. How do we do the draw? This kind of work, that's the thing to understand. Yeah. So it's also going to tell you in the structure, um, how you're going to get the money, right? So typically, you're going to apply for a draw once a month, and you're going to make certain amount of progress through the month. You're going to apply for a draw based on the percentage of completion. And then that lender is going to fund you once a month for the value of the work that's in place. And they're going to use an inspector, usually, to go out there and verify it. They're not going to just take your word that you got 80% of the job done. They'll send somebody out there, check, make sure it got done, they'll approve it, and they'll send you a check for that amount. Some private, hard, private lenders and hard money lenders are going to require you to submit invoices also as backup. So you want to be prepared and organized.
And then the next thing, and the final thing, is how are we going to pay this thing off, right? So when you get to the end of your project, if this is for sale, you want to know and discuss with your lender how quickly they want to get paid off. Yep. On a big project, they might want to be paid off in 60, 70% of the units sold rather than waiting for all the units to be sold. So you want to understand that because it is critical on how much cash and equity you're getting back as you sell each unit. Because most of the projects we do, it's pretty much like on an 8-year townhouse. If we were to sell this, probably the first probably five of these properties or so is going to pay back the lender. Then the last three is going to be all of our profit. So they want their money up front most of the time, folks. And then you got to get your profit at the end. That's how typically how it works. Okay. Yeah.
And then you might be holding a project for rent, right? So you also maybe understand how that's going to happen and how much interest reserves you put in there to carry it. Because now you're going to want to carry it through the period of leasing. That's right. Get it leased up, and then you're going to need a new permanent financing lender that does long-term lending on a rental project. And that's essentially refinancing, and you're going to pay off the construction lender with the refinance.
So to give you guys an example, this is all project at eight townhouses. Chris, could you just tell them on a high level, what is it? How much cash is costing us to actually build this thing? This is what I want to show you. It takes cash to build new construction. So on this project, roughly, we bought the property for a million dollars. That's right. There's some other costs and fees in there, but roughly a million dollars to buy the land. We did a two-step loan process on this. We bought the land, we had to put in 25%, $250,000 to get that loan. Yep. While we did the construction, uh, design and got all our consultants and soft costs in, we had to put in another about $200,000 to get the design and permitting done. Plus we had what's called hola fees on this project. So you might need to be prepared for that. That was another $300,000 in this project. So we had to provide a little over half a million dollars to get this project to approve permits. That's plus our $250,000 down payment. Yeah. Okay. That's $750,000 so far. Okay. Right. What is the fees and everything that cost like, we're talking about points and so then we go into the construction funding, and we showed the bank we had this all approved. We needed $5.5 million to do this job, and we're budgeting in about $260,000 in construction interest, yeah, as well in that project. So knowing all these, uh, percentages and interest rates and all the stuff, running the numbers with the bank, that's where we ended up on this project.
We talked about, you know, knowing your numbers so you can figure out what, how much you're going to pay and, you know, what the finished product is going to be and all that kind of stuff. But, you know, how does someone going to figure out what the, it's going to cost to actually build this? Because they already got the plans, right? They got their lender, right? They know what it's going to require, how much they're going to pay for fees, but they need the number, right? How do they know the number? Yeah. Yeah. That's an important part of this whole loan process. When you come to the bank, you're going to need to provide them with the cost of your project. So knowing your project costs is, is really, really important. You're going to be locked into this loan, and it's going to be hard to get more money later if you run out. So you want to be very accurate with your numbers, very accurate. So knowing your project costs, uh, one thing is, make sure you account for all the costs. Law your land, your property taxes, your insurance, any other costs that you have that are cost to date, make sure you're tracking those so you can also include those in your overall project cost. You're going to include your design, designers, and your consultants, all of those that are included are, you know, architects, engineers, everybody, including permit fees themselves. Everything that you pay out to the jurisdiction, like the city of Seattle in our case, we're paying out thousands and thousands of dollars for these permits. You want to include that in your overall cost, cost as well. And then the last one, and the hardest one, is what are my construction costs? The hard construction cost of this project. And we're going to do another video to go into that because it is so important and detailed. Yeah.
Now you got to get a glimpse what it takes to fund a project. So if you got like what you got heard on this video, give us a thumbs up. And remember folks, do us a favor. We appreciate all you guys, you know, watching the video. Do us a subscribe if you haven't subscribed, okay? Because we're going to actually be dropping more information like this in the near future so you guys can learn more on these long form, okay? But until then, we will see you guys on video 4.