Many people today are looking for alternatives for investing their money that go beyond standard stocks, bonds, and mutual funds. These types of investments have their uses. If you’re planning for retirement, they can be extremely beneficial for accomplishing long-term financial goals. However, for investors looking for a way to improve their lives today, there are better ways to go about it.
If you are among this group, then home construction loans can help you pay your bills today instead of forcing you to wait around for endless years, if not decades, before you can see a return on your investments.
How Do Construction Loans Work?
Unlike mortgage loans, which can have terms of 30 years or more, new construction loans are for the amount of time it takes to actually build the home. Once the home is built, a new loan, a mortgage loan, comes into play.
For the most part, borrowers repay construction loans within six months and the property itself (along with other items you require as the lender) are used as collateral to secure the loan should the project fail for any reasons.
As more of the home is built, the value of the collateral improves. This gives borrowers incentives to repay the loan on time and provides you assurances that you can recover your investment if they are unable to do so. That means you face less risk with home construction loans than you would with auto loans, for instance, where the value of the vehicle that secures the loan is constantly decreasing.
That’s on top of the fact that you’ll usually see a full profit within six months for average homes and as little as two years when it comes to multi-family homes or larger construction projects.
Benefits of Offering Home Construction Loans
Not everyone has the ability to run to the bank and borrow money for home construction. That doesn’t mean they are a credit risk. In fact, credit often has little to do with it. Many people seeking private lenders for home construction investing are building homes for commercial purposes, vacation homes, or even second homes that traditional lenders remain wary of.
This means there is a huge pool of borrowers to draw from and you can afford to be selective about which loans you’re willing to work with.
Are There Risks Involved in Lending for Construction Loans?
Absolutely! There are always risks in investing. There are risks in 401(k) plans, stocks, bonds, and mutual funds once thought to secure. There are steps you can take, though, that will minimize your risks and protect your investment.
One of the most important things for you is to conduct due diligence on every investment opportunity. Don’t get so excited you pull the trigger before figuring out if there is a solid plan in place for a return on your investment. This includes doing the following:
- Learn about the property used to secure the investment. Is it in a desirable location? Will you be able to sell it in a reasonable amount of time? Is it valued correctly?
- Learn about the borrower. Explore the borrower’s credit history, experience buying and building properties, and history of successful investments.
- Educate yourself about the neighborhood. It helps to work locally when dealing with real estate. Learn the lay of the land. Is the community growing or declining? What is the crime rate? What types of properties seem to thrive in the area?
The more you know about the home construction loan and the home being constructed – as well as the borrower – the better you stand to turn a fast profit in home construction investing that will help you pay the bills for your own family.