Construction to permanent loans are an essential financing tool for real estate investors and developers undertaking investment property projects. These loans provide interim financing to fund construction costs and convert to long-term, fixed-rate loans once the project is completed and stabilized. Using these loans allows investors to secure favorable permanent financing terms upfront while bridging the gap during the construction phase.
In this article, we will explore construction to permanent loans in depth – from what they are, to their benefits and risks, to the types of lenders that offer them for investment property projects.
Construction loans bridge financing gap pending property stabilization
Construction loans provide financing for investment property projects during the construction phase, which carries the most risk and uncertainty. These short-term loans cover hard and soft costs to build out the property. Once construction completes and the asset becomes income-producing, the loan converts to fixed-rate permanent financing that the borrower locks in upfront. This structure bridges the gap between project inception and stabilization. It allows borrowers to secure long-term debt on favorable terms despite the project not yet producing steady cash flows.
Interest rates and fees vary widely among construction lenders
While construction to permanent loans mitigate risks for lenders and borrowers alike, they still carry higher interest rates and fees than conventional mortgages. The exact rates and fees can vary widely depending on the lender, project size and type, loan-to-value ratio, and more. Generally, interest rates run 200 to 400 basis points above permanent loan rates during the construction phase. Lenders also charge origination fees around 2% to 3% of the loan amount. Comparing multiple lender quotes is essential to find the best fit.
In summary, construction to permanent loans allow real estate investors and developers to secure competitive permanent financing terms for investment property projects while bridging the gap during the high-risk construction phase. Interest rates and fees are higher than conventional loans but offer more flexibility to complete projects that drive returns.