There is a huge amount of construction in Kansas City in 2022 plus many more proposed projects. 1400 KC on Baltimore Avenue is just one impressive project that is costing over $140 million and covering 260,000 sq ft.
Over in the housing market, things look good for homeowners. Houses on average are selling for 103% of the list price, and the average Kansas City new home now costs $517,000.
With a local government that is both business-friendly and keen on development and redevelopment, Kansas City would seem a prime spot for investment in a real estate project. With continuing property appreciation, an investor could build something for the future in Kansas City with a potentially healthy ROI. But, how does an investor choose the best financing option?
What are the most common types of loans for real estate?
Regardless of whether you are in Kansas City or elsewhere in the states, there are four common types of loans for real estate businesses.
Acquisition loans
Used to buy land but not to develop it.
Development loans
Used to develop previously purchased land.
Acquisition and development loans
Used to buy and develop land.
Construction loans
Can be used to redevelop or modernize existing builds, or to finance the construction of a new real estate project. The finance comparison site, ValuePenguin, lists typical interest rates for real estate loans. They put the interest rate of construction loans at between 4.75% to 9.75%.
Where you acquire your financing though, will have a bearing on how much you pay.
Where can you obtain financing for a real estate project in Kansas City?
For commercial real estate projects, there are a number of different options for acquiring financing. Some will be more suitable for certain individuals and projects than others. Some of the borrowing options are obvious such as banks, and others are more specialized. For instance, the local government in Kansas City has several initiatives to help real estate development. For some developers, the Rebuild Kansas City Neighborhood Grants may be an option.
Other standard borrowing options are as follows:
- Financial institutions such as banks
- Angel investors
- SBA loans
- Real estate crowdfunding
- Venture capitalists
- Private money lenders
- Hard money lenders
- Microloan specialists
The differences between these ways to borrow can be the length of the loan, the terms, the leverage needed, and what credit score matters. A common credit score for an individual is 698. While the business and personal scores are separate, some lenders will review both.
What are the differences between these lenders?
Some of these lenders are businesses, some are banks that are institutionalized, and some are investors keen on acquiring property.
Angel Investors
An angel investor will have no interest in lending you money, but they may be willing to invest the sum you need for a slice of your real estate project.
Private lenders
Banks will require credit checks, while private money lenders have easier terms to meet but with high-interest rates of perhaps up to 18%. Hard money lenders are another option separate from the traditional route of commercial banks.
Hard money lenders
A hard money lender is typically used when a real estate project requires a cash injection on a short-term basis. For example, DFW Hard Money in Kansas City can provide a loan leveraged against the value of an asset such as a building under construction. The completion of a real estate project may have stalled due to a shortage of funds, and a hard money loan allows for the construction to be finished.
Microloans
These are useful for small businesses, but they often won’t provide all the financing needed for bigger projects. For someone fixing and flipping a house, a microloan may be suitable. Typically, these loans usually go no higher than $50,000.
What types of real estate projects are covered?
Many real estate projects will be commercial in nature, but the financing needed may not be simply for construction. When approaching a private hard money lender the reasons may be more diverse.
Entering into a real estate project requires a good construction management plan, but sometimes budgets go over, or unforeseen circumstances happen. Therefore, in these instances, a bridging loan may be needed.
Other reasons for taking out a loan on a real estate project can be for fixing up properties to flip them, to develop land, construction, or for transactional funding.
This latter is a unique type of loan that allows a property investor to purchase a building or land and then sell it straight away, sometimes on the same day. Hard money loans or private lenders are typically used in this instance.
Summary
While there are several options for financing a real estate project in Kansas City, not all of them will suit every individual or business. Small businesses may prefer the option of approaching a bank for their loan. But, someone in need of short-term lending quickly may need a hard money loan.
Then there is the option of crowdfunding which is getting more popular or looking for investment instead of building debt.
One thing is clear, Kansas City is going to see a lot more real estate projects coming to fruition as development continues to modernize the City of Fountains.