Financing a new construction duplex, triplex, or fourplex in a masterplan community is pretty unique. A lot of times investors come to us and say "oh, I already have a bank." That's okay, but kind of not. So we want to talk about that today. It's not that we don't want you to have flexibility in your lending options, it just is a little more complicated than you might think.

First of all, there are two loans that are going to take place in your garden variety, Fourplex Investment Group transaction. There's your construction loan, and then there's your long term loan.

The Construction Loan

As an investor comes in, they put 25% down, plus all of their closing costs, and a year's worth of construction interest reserve. This is what it takes to actually buy the deal.

Now you own the ground! The interest rate on these kinds of construction loans usually falls around three quarters, maybe a percent higher than what you're seeing in the long-term market. Keep in mind, the long-term market is different than owner-occupied financing.

Owner-occupied financing is that guy on the Quicken Loans commercial who's always saying if your rate is higher than 1/10th of a percent you need to call him. Well, that owner-occupied rate is different than an investor loan. So if you're thinking you're going to get the same interest rate on your fourplex as you got on your owner-occupied home, that's not going to happen. That rate's going to be half to three-quarters of a point higher than your owner-occupied rate.

And like I said, it's interest only. And those construction loans are typically issued by local banks, small banks, regional banks, or credit unions. You're not going to go into Wells Fargo and say, I need a fourplex construction loan for a big deal. They're not going to know what to do with you. 

So let me just save you the time: Even if you've got a private banker over there or something... We've been to that rodeo many times, and it hasn't worked.

The 30-yr Fixed-Rate Loan

Now it's time to get your long-term loan. Most lenders can, if they know what they're doing, do a fourplex, long-term, 30-yr fixed-rate loan. We have a preferred lender at FIG that does more of these than anybody in the country—and it's not even close.

So when we take a pre-approval letter from him to a local bank in Arizona, Utah, Idaho, or Texas, it means something. The bank will approve you for a construction loan if FIG's preferred lender already approved you for the long-term—because that's the primary concern the the bank has—will they get paid from their construction loan. That's what they want to know.

So you could, in theory, come with a letter from any other lender. But then the bank is likely going to have a billion questions, and the development has a tight schedule here. So short answer: You need to stick with our financing/approvals on the front end to be able to get your construction loan.

Can I Use My Own Lender?

(Watch the video above or on YouTube)

This is a map of Entrata farms in Idaho. I've been using this map as an example lately. In the bottom right corner, highlighted in red, is phase one. And you see A, B, C, and D, there. It's a duplex and three, fourplexes.

In this particular phase, we get a construction lender to be okay with this. It actually takes about a year of dialogue for them to understand and to go all the way up the food chain at a local bank or credit union.

Let's say that investors A, B, and C all play ball. They stay with the preferred lender, but investor D doesn't. Investor D wants to use a different construction lender. What we've seen happen before, and the reason we're so rigid on this is well, is A closes on their fourplex or their duplex, so does B, same with C... Then all of a sudden this construction lender that we don't know and have no history with is delayed on D. Maybe they don't even close.

And guess what that does? Now, investor C can't even start construction because they're attached to unit D whose bank is running behind or not cooperating. All because we couldn't vet them internally ahead of time.

So not only is C late and they're grumpy about this, but buildings A and B are going to complete and those owners in those buildings want tenants. Wouldn't you? But can they get them? Because next door, D is a disaster. It's a hole in the ground or it's still being framed.

By not going with the preferred lender, this has now created a domino effect for us and each investor. And this is going to multiply as we get up into the subsequent phases. That's why you've got to use our team on the front end of the loan to get pre-approved through our people at first colony mortgage.

They will then get you the construction loan (which by the way, they don't make any money on). The reason they're getting you the construction loan is that they want to earn your long-term business.

Can you use your own long-term lender then? Well, that affects us less. If you're taking forever to refinance your construction loan, that's only your problem. Now, you might be paying penalties if the lender isn't getting it done on time. After all, the construction lender wants to be paid off. So, if your long-term lender is dragging their feet or can't get it done, that's your problem. But we don't want you to have it in the first place.

Our lender team is here in the office with us. They know when to lock interest rates; they know when to start your long-term applications; they know when to do all of these things. If you do go outside of our preferred lender network, it makes a lot more work for us. It will be much simpler for you to go through our lender. They already know how to answer your questions and the questions that the appraisers are going to have. They're ready for anything that needs to happen in order to get from point A to point B, which is helping you close on an investment property.

We always know when someone hasn't used our long-term lender because we get a whole bunch of questions and everybody ends up pulling their hair out, including you.

To help make the decision more obvious, using our preferred lender also gets you free refrigerators in each of your units. So can you use your own lender? Sure, but it's definitely in your best interest to compare First Colony Mortgage as you shop around. They're here to do volume and not in this to make big fees. They do most of our fourplex loans each year and we're pretty confident that you're not going to find anyone lower.

And a low-interest rate on a loan that never closes doesn't really even matter. Does it?

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