Regardless of whether you are doing new multi-family development, or Value-Add rehab projects, Understanding how your lender looks at Loan to Cost and Loan to Value ratios is critical to understanding and mitigating your risks in any multi-family deal that involves construction.

Having served on the Board of Directors and loan committee for a Chicago community bank that specialized in commercial real estate and construction lending from 2005 through 2010, I not only experienced the 2008 “Great Recession” first hand in my own development business, but had extensive experiencing helping our borrowers work their deals out.

Many of the bigger developers that came through that time in the market have now become very successful and are semi-retired. A lot of the smaller developers (and lenders) are not around today.

The vast majority of people doing these deals today did not have the benefit of experiencing the drop in values that came with the Great Recession. 

This video can help you to understand. It’s all about values and capitalization!

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Most of us would like to avoid Risk, but lenders and professional investors, know that understanding risk is actually their path to long term success.

It’s important for all multi-family investors to understand the lender’s perspective because when you have a commercial mortgage / construction loan, your lender ultimately has a great deal of control.

Multi-family income property is an great way to build wealth and right now, it’s the perfect way to hedge against inflation, but most of us do understand that you just you don’t make money without risk, right?

Now if you’ve been out looking for multi-family investment properties to buy, you’ve probably found that any property in good condition, in a good area with good cash flow will cost so much that you won’t be able to make very much money on it.

If you want higher returns (which most investors do), you need to find properties that are underperforming and can be renovated and re-positioned to increase their income, these are what they call “Value Add” deals.

Likewise, Developing new construction multi-family is like the ultimate value-add deal because it is 100% new. These properties attract the best tenants and generally get the highest rents for the area. When executed properly, they can also create the highest returns.

Having been on the Board of Directors and the loan committee for a Chicago community bank specialized in real estate lending from 2005 – 2010, I want to talk about the risk factors involved in multi-family deals that involve new construction and/or renovation.

The fact is that, assuming the principals know what they are doing, the vast majority of Value Add or New Construction deals are going to be quite successful and profitable, but once in a while, they can and will run into troubles.

If you do 10 deals and 7 are very profitable, you may have one or two that are only so so and you may also have one or two that get caught in a bad market period.

To mitigate risk, we want to consider what can happen if things don’t go according to the original plan and have some contingency plans in place.

Once they are completed, leased up and stabilized, these projects will have all the same risk factors as any other stabilized properties you might purchase. Less actually because they will be new or newly renovated.

Of course the income numbers projected in their loan application rely on renovation / construction being completed before they can be leased at these higher rents.

This means that they will be subject to additional construction related risk factors. These risks are what we discuss here and in the next video where I’ll discuss why you need to understand the lender’s perspective on Loan to Cost and Loan to Value ratios and how they affect you.

✅ Watch NEXT VIDEO – Loan to Cost & Loan to Value: https://youtu.be/lap9Jy0-KCY

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I just heard Elon Musk telling a group of his investors that now is a good time for them to invest in real property as a hedge against inflation.

In other words, Elon is talking about using their capital to expand or make improvements to their manufacturing facilities by adding new land, buildings and/or machinery.

Inflationary times normally signal a rough patch for stocks. It makes sense to put your capital into real property because your cash becomes worth less, while real property generally increases in value along with inflation.

For individuals investors, multi-family income properties are by far one of the most reliable and profitable ways to hedge against inflation.

Not only will multi-family investment property normally increase in value along with inflation, but you can also earn great returns which include:

Appreciation: Aside from increases in value due to inflation, we normally see 3-5% appreciation compounding every year.

Leverage: Your investment capital is leveraged by borrowing at historically low rates

Passive Income: (in a desirable property, rents tend to escalate year by year, but rents also tend to increase with inflation )

Loan Principal Reduction: Your tenants are paying down your debt every year which is money in your pocket.

Tax advantages:

1. Depreciation Deduction (in addition to operating expenses). 2. Lower capital gains rates on sale. (can often be deferred and rolled forward into another investment using a 1031 exchange).

All of these add up to make your “hedge” a great investment for you to build wealth, but If you’ve listened to me before, you know that I’m always talking about the many advantages of building new multi-family investment property as opposed to buying older buildings.

To learn more, grab a copy of my new book on Amazon:

Don’t Buy a MULTI-FAMILY! BUILD IT

I’ve also included a link in the text below for a free eBook, so you can start reading right away.

You’ll want to click to the next linked VIDEO:

https://youtu.be/Hhq4RrpWRpE

To see the Equity numbers and begin to understand why building new investment property is so much more profitable than buying older buildings!

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✅ Purchase New Book on Amazon: Don’t Buy Multi-Family! BUILD IT https://www.amazon.com/gp/product/B09PSFMC6Z/

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

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So you’ve decided you want to invest in multi family properties, but you don’t want to put on a tool belt and be the handyman.

That’s the whole point of my new book:

Don’t Buy Multi-Family! BUILD IT

Whether it’s an owner occupied 3 unit, or a bigger investment property, any apartment building you buy is going to need some work. If it’s in great condition, the price will be so high that you can’t make any money on it.

What people don’t realize is that they can own a brand new investment properties and get great returns by building their own new construction buildings.

And you don’t need to be a contractor. In fact most developers are not. There are plenty of professionals out there who are ready to help you do it.

If you’re just starting out with a smaller owner occupied building, you’ll get yourself a great new home and an income stream to help pay down your mortgage without the headaches of owning an older building that constantly needs work.

Right now, there’s huge demand for new construction units and rents are at all time highs. That’s why you see big developers putting up high rise rental buildings just as fast as they can right now.

And that’s why you should follow their lead!

My new book:

Don’t Buy Multi-Family! BUILD IT

is a short read, but it will show you how you can get started building new multifamily properties.

Today I’m giving away a few free ebooks from the link below.

If you’ve been looking at buying older properties, Check it out.

You’ll learn a much better way invest in income properties.

Once you understand the numbers, you’ll never think of buying older properties again.

✅ Download FREE eBook: https://LD2development.com

✅ Amazon Author Page: https://www.amazon.com/author/rogerluri

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