What is the Interest Reserve Account?Apr 15, 2021
People often ask, especially after seeing the closing costs of FIG's construction financing, "why are the closing costs a little bit higher than I would see compared to another property of this size?"
The bulk of costs associated with the construction loan is the interest you'll be paying over the 12-month build period. An investor prepays that cost upfront at the time of their construction and it's held within an interest reserve account. The construction lender looks at the deal and says, "based on our formulas, here's how much interest is likely to accrue over the life of this construction loan."
And as part of FIG's wholesale model, each investor is purchasing their property pre-construction. So you're getting a discount on the property upfront which is one of the great value propositions within the FIG model that is so appealing to investors. It's this concept of the pre-purchase build-to-rent model.
Interest is paid upfront at the time of the construction closing. That way you're not having to cut a check to the bank each month as interest accrues while the loan balance grows during the construction of the process.
This is one of the reasons why the interest is higher on our proformas. Other than that, it's just the standard fees that you would see if you were to go purchase any other property. And so we've got a whole separate video on the interest reserve if you're interested in learning more about that, but that's something that comes up quite a bit.