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All About The Build & Hold Strategy

Build & Hold has been our main strategy ever since we started. I'm going to give you a quick run down regarding this strategy based on our personal experience, however like anything else, don't jump in without doing your own research.

New builds need the right market:

In order for new builds to work to your advantage, you need to be in the right market. By that, I mean you need to be where the values are higher than the cost to build. If you're in an area where you can buy houses for less than 150k, well it's likely going to cost you more to build something new. Especially these days with costs of material and labor being at an all time high. Even though values have also peaked, you can't rely on them to stick at those high numbers forever. Values can go up and down. Your costs however and your mortgage will be there to stay for a long time. You absolutely need to make sure the numbers make sense, while planning for a worst case scenario.

It's important to have a strong understanding of your market before you decide to invest, no matter the strategy. You need to make sure it has the right balance of supply and demand, employment opportunities, costs of living, immigration, available labor and trades and of course the real estate values need to make sense. Speak to a local realtor, inquire at the municipality and/or do a google search.

How to finance for New Builds:

When it comes to building new, banks have a higher risk when loaning for something that doesn't yet exist. They don't want to repossess a half built home because that would be extremely difficult for them to resell. That's why many banks don't do these types of loans, especially if you're a first timer with no previous construction history. It doesn't mean it's impossible to get approved for a loan like this today, it just means you might have to get a little more creative to get it.

Private Lending: We've found that private lending was easier to get than conventional lending because there was no bureaucracy, no delays and no hassle. The down side is it's way more expensive. We had set up fees, we paid for both parties legal fees and we had to put more of our own money down, and of course the interest rate was way more expensive (can be anywhere between 8-15%). These loans however are usually just short term loans (during the length of the construction or renovation project). When construction is over you get a conventional mortgage and pay back the loan, all the fees, the interest and sometimes even are able to pay yourselves a little something extra. We had even asked our lender to formulate the loan in progressive cash advances like a typical Construction loan with the bank that way we only paid interest one a chunk at a time.

Typical Construction Loans:

Our typical construction loans with our credit union are definitely the cheaper way. The usual interest during construction is around 4% and there are no start up fees. But normally we just had to have the 20% available as a back up, either in our account or as a line of credit. The only downside is that generally the interest rate on the final mortgage is decided at the beginning of the loan, so it could end up being just a tad higher than the going rate.

How much construction knowledge you need:

Having construction experience is definitely a huge asset. When we first started on our first build, we were fortunate enough to have my dad coach us but we also had an architectural technology degree under our belts which helped us understand the fundamentals of what we were doing. What my dad taught was something you don't learn from books however, he helped us line up the trades and taught us a lot about the trade work and how to do it right. If you don't have someone who can coach you, all you have to do is ask around. You may have to ask several contractors before one of them agrees and it might even cost you some money to get proper coaching but that's OK. I personally think this is the best way to learn and once you've done one construction with that guidance, you should be able to manage the next one a lot more independently.

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