An as-is and as-complete appraisal determines your property's current value and its projected future value after adding units. You need one to confirm what loan amount you can qualify for upon refinancing and to ensure you can recover the capital invested in the project.
Yes, properties with four units or fewer typically qualify for residential financing, allowing you to borrow up to 80% of the property's value once construction is complete. If you have reached the limit with residential lenders, you can also finance a four-unit property under commercial terms based on the property's income.
Construction loans are generally interest-only at prime plus 2% to 3%, with lenders often taking their interest upfront. Lenders typically provide 75% of the current property value and 75% of construction costs, though these ratios can go higher depending on your experience and the project location.
Lenders hold back approximately 10% of each construction draw as a reserve for construction liens. These funds are placed in a lawyer's trust account and released only upon project completion when the units are ready for occupancy.
Dalia Barsoum generally advises against tying up a large line of credit in one construction project because it consumes all your capital and leaves no reserve for unexpected costs or opportunities. Instead, she recommends combining construction financing with your own capital, investor funds, or creative solutions like vendor takebacks.
