Several factors need to be considered before planning a construction project:
1.-Type of project
3.- Construction lot
And (most importantly),
Deciding on the budget is the most crucial aspect of a real estate construction project. A well-planned budget is vital because the money you invest in the project determines the return of your investment.
When deciding on a real estate construction project’s budget, there are two types of costs one should consider: hard costs and soft costs.
Hard Costs vs. Soft Costs – Understanding the Difference
Before stating a budget for your construction project, you should be clear about what each of these costs mean.
HARD COSTS. - These are the visible and tangible ones. They are easy to calculate since they are directly associated with the building’s structure. The material for construction, machinery, labor, landscaping, HVAC system and safety systems are all examples of hard costs.
Hard costs are sometimes referred to as the brick-and-mortar costs; those that are visible; right in front of us we categorize as hard costs. Since the amount of material, the equipment, and the labor you require are part of the initial plan, hard costs are easy to calculate.
On the other hand, to calculate the soft costs in a construction project is more challenging.
SOFT COSTS. - Are the costs not directly linked to the construction of the project. Unlike hard costs, they are not visible, tangible, and therefore, hard to foresee. Including them in a construction project budget can be difficult. These costs include pre- as well as, post-construction elements-, such as architectural drawings, permits, licenses, leases, and maintenance of the building. Litigation fees, insurance, architectural fee and construction fee are examples of soft costs.
We can say that hard costs are the direct construction costs, while soft costs are indirect construction costs.
Managing the Hard and Soft Costs
Construction companies who are looking to finance their projects, need to identify the difference between the hard and soft costs in their budget because many lenders—whether it’s a banking institute or a hard-money lender--, will PAY ONLY for HARD Costs.
When your project is ready to enter into the phase of execution, you can apply for a loan. An ideal approach is to buy the land before applying for a loan as it increases the chances of approval. As lending trends have taken a shift over the past few decades, it becomes more difficult for construction companies to get loans through traditional means.
An increased number of construction companies are opting for hard money lenders because it is a reliable way to get their project financed.
The first and foremost factor that persuades a construction company to choose a hard money lender over a traditional lending option is the loan closing speed.
Hard money lenders have experience in the industry and can close a loan faster in comparison to other financial institutions. The reason why these loans close faster is the fact that private lenders focus on the collateral, and the borrower’s ability to repay the loan. One’s credit score and historical losses are of less importance.
In construction projects, private lenders take the land as collateral. When a loan deal closes faster, the construction company can then proceed with the execution of their project quicker!
Another factor that makes hard money lending a good option for construction companies is flexibility. These lenders do not use the standardized underwriting process; each deal has a unique underwriting process, which depends solely on the specific situation.
Higher Chances of Approval
The predominant reason why hard money lenders are a top choice for construction companies is that the chances of loan approval are high. These lenders use the collateral policy for the safety of their money.
Hard money lenders like AMI lenders are helping construction companies and real estate investors get on with their projects faster and complete them without hurdles.
Looking for a private lending company to finance the hard costs of your construction project? AMI Lenders is a pioneer of hard money lending for construction companies in Houston, Dallas, and Austin.