Episode 28: As a Real Estate Developer, How Do I Finance My Build?
Summary
As a real estate developer, you build out properties to their highest and best use, but how do you pay for it? A detailed scope of work, budget and timing will help you and your contractor manage expectations. Then where do the funds come from? We talk about all kinds of funding sources you with your detailed documents! All this and more in today's episode of My Life As A Landlord!
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Full Episode Transcription
Welcome to My Life as a Landlord, where we untangle all things housing and educate the curious. If
you're looking for some entertainment with some honest, awkward conversations, you've come to the
right show. I'm your host, Dr. Jennifer Salisbury. This is my life as a landlord. Welcome to it.
Well, hello there. Welcome to my life as a landlord. I'm your host, your guru, your teacher, dr. Jennifer Salisbury.
And I am super excited that you are here joining me this week. Thank you so much. For those of you new
to the podcast, we have five rotating topics, one each week. And I publish a new topic, a new episode
every Saturday morning. It's available on Spotify, Apple, podcast, and many other platforms. So please
make sure you sign up for notifications and follow the show. This week's topic is Real estate
development, and the five topics follow like a Mary Go round. They're the same five topics every week.
Last week was Tenant Perspectives. This week real estate development. Next week will be real estate
investment. But today we're going to talk about how to finance your build as a real estate developer.
Now. Most people are not professional developers. Mike and I are licensed general contractors. We
are real estate investors. We have investment companies and rentals in both the US. And Canada. And
when you say the word real estate developer, there's a lot of stereotypes that come along with that
word. Now, I must tell you that you're talking with any kind of government entity and you want to
improve a property in any form, whether it's building a fence or expanding the house or whatever, you
will be referred to as the developer. Even if you're not the contractor, you're still the developer, which is
very interesting because most people don't view themselves as that, but the government agency does. The
government agency will see you as a real estate developer. What is a real estate developer? Well, a real
estate developer aims to build out a property to its highest and best use, meaning highest and best use of
whatever that property can allow, whether it's for zoning, density, whichever. So this week is a little bit
different. Normally I do three points and then a call to action. This week I'm going to still do three points
and a call to action. But when we're focusing on how to finance a build, I'm going to give you a scenario.
Now for those of you who are listening and that you're more of an experienced real estate developer, this
is going to be a relatively simple example. And that's okay. Follow my logic on this and just understand
that the whole goal of this podcast is to figure out some different creative ways on how to finance a build.
Okay? So let's jump right into it. Okay, so let's see. You are a first time home buyer. 1s You have bought
a single family home, moved into it and you've utilized that first time home buyer reduced down
payment. You've got a mortgage payment and you've got a budget for your home paying property taxes
and insurance and repairs and whatever else you might need. But you have recently found out that your
family is going to spanned very soon. Let's say in seven or eight months you're going to have family
moving in with you. Or maybe your adoption has been approved or maybe you or your partner is
pregnant. Whatever. The point is that you are going to have a bigger family in your new single family
home. That you have used your first time home buyer opportunity and suddenly now the house is too
small, right? So expanding your home, most of the time when we find out what one of our tenants is
pregnant, we immediately know, okay, if they're in a one bedroom with a shower, they are going to want
a two bedroom with a bathtub. So let's say in this scenario you need to add a bathtub and a bedroom. So
that's what we're going to say is your family is expanding. You need to add a bathtub in a bedroom.
You're going to see as a developer, you're the homeowner. You're going to ask yourself again and again
and again how vital. Is this bathtub and or bedroom. This is going to test you, especially figuring out
how you're going to pay for it. Okay, so one option is you could potentially sell the home buyer bigger
home. But remember I said you bought your first home using that first time home buyer. There very well
may be limits on when you can sell dollars or when you can refinance even on this new home, right? So
if you're in Canada and you've utilized your CMHC or there's a couple of other different programs for
first time buyers, there are limits on what you can do. And they will not let you well, I'm not saying they
won't let you they may not let you do it without a penalty. There might be a significant penalty. You
might want to read the fine print if you're thinking of selling a home after you've used your first time
home buyer opportunity. Maybe in the US. You've used your VA loan. You're a veteran. You've used
your VA loan. And there are also other issues that could go with selling a home relatively quickly or
trying to refinance relatively quickly. My point is that you really want to look at the fine print of your
current mortgage holder before you start thinking of selling and trying to get a bigger home to
accommodate your expanding family. Another issue is if you were to sell your home, let's say you were
successful in doing that. Now you've got to buy another home. And as I'm recording this, in June of 2023,
the interest rates are going up and up and up. And if you're going to buy something else, guess what?
You're no longer a first time home buyer. You're going to have to come up with a lot more cash as a
down payment. And very likely your interest rates are going to be much higher than your original first
purchase. In short, I think we can agree in this scenario, selling is very likely not the most ideal option.
Okay? So let's figure out if you really want the bathtub and the bedroom, then we need to figure out some
way to get this money for you. But how much money do you need? That's the question. Do. In a previous
podcast I've gone through extensively on how to find a contractor, and the discussion in that podcast was
all about scope of work and screening the contractor itself. I highly encourage you to revisit that podcast.
Feel free to go back in the library, you'll see it. But in this scenario, you need to know how much money
you need to support your renovation to add a bathtub and bedroom. So let's talk about both. If you're
going to add a bathtub, you're going to change some fixtures, you're going to take out a shower. You
might have to move a wall to accommodate a bathtub. That very likely will include either a plumbing
permit and or a plumber. And depending on where you are, you might have to have a licensed plumber.
Now, your local area, wherever you are, geographically, if you're not sure if you need a licensed plumber
or a plumbing permit, you simply need to either call your county center or your city hall. They will tell
you or your regional district, they will tell you what is required and explain the scenario. And they will
say, yes, you need a licensed plumber. No, you don't need a plumbing permit, but you need to know the
rules on this one. If you're going to add a bedroom and you're going to actually move a wall or move an
exterior wall or something to accommodate this bedroom, actually going to change the footprint of the
house, you might be affecting something structural. You might have to extend a roof line. Maybe you
can build out part of a basement and create a bedroom down there. There's lots of different scenarios, but
you need to expand on your scope of work, of exactly what are you trying to figure out and really what
are you capable of inside the existing home as much as possible. And to that you're going to have to work
with some contractors if you can get them. I mean, think about it. We got trades now. The folks that are
very experienced and skilled and are leaving the industry, they're retiring. We've got very few people
entering the industry. And that means that the folks that are in the trade industries now, all the varieties
are becoming more and more valuable, more and more rare. And as a result they're more expensive and
they're scheduling further and further out. Sometimes contractors even to come out and do an estimate
will require a fee just to come out because you may not pick them and so you need to pay them for their
time. But as a result, this contractor, if you can get them out, if you can get them scheduled again, all this
takes time and effort. Contractor is going to come out and take a look at your bathroom. They will very
likely walk around both the inside and the outside of the house, especially if you're going to have to start
moving walls, applying for permits. They may very well want to look in the crawl space or a basement
area, look at your plumbing stack. They're going to want to figure out 1s where is everything? Like how
hard is this to do to add a bathtub and expand the bedroom or create another bedroom? How hard is this
is actually going to be before they give you a scope of work? 1s Now in that scope of work, they're going
to include cost of permits, cost of subcontractors. Sometimes it's cost of materials as well. 1s Maybe
you're paying for materials separately. You need to figure all that out on how you're doing it, knowing
that in this world of inflation right now, the material costs are fluctuating. And very recently during
COVID if you remember, the construction, materials were fluctuating wildly. It is amazing to see drywall
and lumber and plywood just skyrocket. And then they came back down, and it's a little bit of a roller
coaster. And so you need to make sure you understand both labor and materials aspect of your scope of
work. The other thing that you need to learn is the duration. Once you hire this contractor, or one of the
three, ideally you should get three bids from the tractor. That includes the scope of work, the budget and
money. And then the budget in time, the duration. You need to understand how long it's going to take
once you say yes, and know that once you say yes, then they will schedule you. Now they may schedule
you in six months. 1s For your two week build. I have no idea if that's true or not, but you're going to
have to work around that contractor schedule. And, oh, by the way, if you need permits, which in this
scenario very likely, will at least need a building permit, if not a building and a plumbing permit, maybe
even electrical permit to put some outlets in that bedroom, you are going to have to apply for some
permits. And depending on where you are, those permits may take a while. Right. In the state of Hawai
Hawai, there's some delays in permits. Okay. Also, when you are working with this contractor, when they
do this work, this is your home. Are you going to be home while these people are working on your
bathroom and creating another bedroom? You need to think about that. If you need to relocate and go
camping for two weeks or there's a friend or family member nearby that you can bunk in with for a bit,
you might consider that because it sounds like in your new single family home, as a first time home
buyer, that you're expanding. This is going to be a little bit tight, and it's going to be a bit invasive for
that duration. So you might consider that you need to relocate for the duration of this build. So once you
have your budget, let's say the budget, you've gotten three bids for somewhere between 30 and 40,000 the
duration of the build. Everybody agrees it's going to take right around two weeks. Once you have
permits, they're all scheduling in different times, but they're all roughly four or five, six months out. They
don't want you there. They would prefer that you relocate during the time that you're there. Okay? All
those things, 30 to 40,000. But if you add a contingency, let's say you need to go up to 50, let's just say.
So your amount that you need to find is closer to 50,000. Now remember, you just bought this house.
You paid your 5% down, which was likely all the pennies in the couch cushions. You very likely don't
have a whole lot of extra money to put towards this build. This is where you need to do some soul
searching as the developer improving your house. Do you really need a bathtub? Do you really need an
extra bedroom? Is there a way that you can work around it or get creative? But let's talk about creative
financing as we go through this. First of all, is there equity in the home? You haven't lived in this home
very long. The first thing you can do is you need to read your mortgage document. Because as a first
time home buyer, there may very well be limits on when you can either refinance or put a second
mortgage on the property or even a line of credit. There may be limits. They may just say, you know
what? You're a first time home buyer. You can't do anything like that for five years. They might slam the
door in your face pretty quickly. If there is even equity in the home. Perhaps the home hasn't had enough
time to appreciate there's not enough time that's gone by yet. So that may be it too. So equity in the home
may or may not be an option. But let's talk about another option for financing this build. If you have good
credit and you have your documents from your contractor, your detailed scope of work, and your bids
from your contractor go to your local bank or credit union, especially someone who you frequently use,
right, your regular bank account, maybe your paycheck gets deposited there every week or every other
week. That's who you want to go to and say, look, I need a personal loan, or what they call a signature
loan for the 50 grand. And even if they don't give you the 50 grand, maybe they give you close to, maybe
they give you 40 or 42 grand, something that would at least allow you to sign with the contractor and get
them scheduled. How this normally works, this personal loan or the signature loan, it will go on your
personal credit and it's an agreement with the bank. That is a very short term loan, usually two or three
years. Now, I have personally done this. 1s I got a signature loan for $40,000 for three years. I paid 1200
and some OD dollars per month and the bank withdrew the payment amount on the first of each month
for three years to pay back that. Now, did I get my funds? I did. It was hard because I knew that payment
was coming out every single month and so it affected the budget, the household budget, because I knew
that money was coming out, but I was able to do my renovation right. So again, I go back to how bad do
you want this bathtub and bedroom for your expanding family? So a personal loan or a signature loan
may be an option for you and you want to explore that. You also want to make sure your credit is in
check because if you have questionable credit, very likely this will not be an option for you. Also, I've
got podcasts previous about how credit is critical. So please, if you've got questions about credit, go back
and listen to a previous podcast. Okay, so we've talked about funds that are equity in the home may or
may not be there. Personal signature loan may or may not be an option. Let's talk about the third option,
which some people are either for or against, and that's using credit cards. Oh, I said it. Oh my goodness.
Using credit cards. Now, I am betting that your contractor will very likely not accept credit card payment.
If you're buying some of the materials, you might be able to put some of the materials on credit. But one
of the options you can do is especially if you have a credit card with either a higher limit or a credit card
that you've had a really long time, call the credit card company like Visa or American Express, whatever
it is, and explain to them what you want to do. Explain your family is expanding, you've got this scope of
work and this budget and you're looking for either an advance or a loan of some kind. Remember, these
credit card companies are also a form of financing. They're also a bit of a lender, right? That's what credit
cards are, is very short term financing. So talk to them. Pre COVID. Mike and I did take advantage of an
American Express offer for a $25,000 cash advance, 0% for, I think it was for two years. 1s And we had
two offers and we ended up taking a $50,000 advance. And quite frankly, we went out and bought a
house with it. But we had to figure out how we were going to get this 50 grand. Well, that's what we did.
But again, you need to have this conversation with your credit card company if your credit is only so so
that may or may not be an option. Very critical that you understand your credit. But if you're trying to
really push hard to get this bathtub in this bedroom that you feel you need or you want, then you need to
push hard to figure out how you're going to finance it. One of the last things, there are other options, but
I'm just going to say this. The fourth option in this is a personal unsecured loan. Basically a friend or a
family loans you the 50 grand based on your word. So there's not a mortgage registered. You're not
taking out a loan. It doesn't go on your credit. If you default, you're upsetting the relationship more than
your credit. But that's another way to do it. Now, that depends on your relationships with your friends
and family and your history of lending. If they're supporting you, then there you go. Now, if any of those
options, whether it be equity in your home, personal or signature loan, credit cards, or a friend or family
member loaning you money, let's say they can't lend you the 50 grand that you feel you need. Let's say
they can only lend you 25. I encourage you to go back to the contractor and say, okay, now my budget is
25 including contingency. What can I do for 20 grand instead of 50? And they may come back and say,
okay, well, which did you want? Did you want a bathtub or a bedroom? And this is where you have to
really decide what's important, right? If you didn't want to sell the house and you can say, you know
what? We really need that bathtub. We need a bigger bathroom. Or maybe you say, you know what, we
can live with the shower. For now, we'll just use the big kitchen sink to bath the baby. But we need a
nursery. We need a spot for the baby to land or the toddler to land, whatever it is for your expanding
family. That's something that you need to figure out for yourself. And in real estate development, you're
constantly juggling choices, availability, you're constantly adapting. And this is no different. Okay, so as
a real estate developer, which is how the government agencies are going to look at you, how do you
finance your build? I gave you a scenario. We discussed how critical it is that your scope of work is. You
need to know your budget in not only money, but also time. Figure out with a contractor having properly
screened them and then where are you going to get these funds? From? Can you get the funds? If you
can't get them all, what can you live with? What do you really want to do to expand your family? Right?
What are you really going to do to accommodate that expansion? So here's your call to action. When was
the last time you updated your household budget? 1s Your household budget is all about your regular
recurring expenses, the income that you're bringing, which typically for most people in their primary
residence, that's your paycheck. And then whatever is left over, hopefully there's something left over,
hopefully can either go into savings or paying down some debt or whatever. Now, why do I bring this
up? If you can't get the 50 grand or you can't get all the money that you need, where is it going to come
from? You either have to wait and let your equity appreciate, maybe, or you're going to have to save
some money or you're going to wait for a deal to come up on one of the credit cards offering you in
advance. All of these are different options, but you need to have a current budget. You need to
understand where your cash flow is coming from. And of course, in this day and age, there's all kinds of
fun apps that can help you with your budgeting. And I encourage you to make sure that you understand
your budgets. When you're a real estate developer, you need to understand where every single dollar and
minute is going. That's really important. 1s As we close out this week's episode, let me know your
thoughts on the Facebook group. Maybe I missed something and I know this was a very simple scenario,
so I'm happy to hear your stories, answer your questions, and remember the comments and questions I
get breed into new podcast episodes. So please have a conversation with me. Next week's topic is Real
Estate investing, and we are talking about all kinds of lending, all kinds of different tools, not even tools
that we talked about today. There's all kinds of creative tools. I look forward to talking to you about it
next week. See you Saturday.
Thank you for joining us this week. To view the complete show notes and
all the links mentioned in today's episode, visit our website at www.mylifeasalandlord.com. If you're
looking for educational resources for getting into real estate investing, becoming a landlord, or even a
better tenant, then I have a page on my website to get you started looking for a solution to the pickle that
you're in. I have suggestions for that too. You can throw your situation on my Facebook group, My Life
is a Landlord, and let our community help you with solutions. Also, before you go, make sure you
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Thank you again for joining me, Dr. Jennifer Salisbury, in this episode of My Life
as a Landlord. I'll see you next time.