In Construction Financing, Cash Is King
“Managing Cash Properly Is One Of The Keys To Construction Financing Success”
Even after construction financing has been secured for your residential construction project, cash flow problems can develop due to assumptions the borrower makes around what expenditures the approved construction loan is going to cover.
Construction financed funds can’t be advanced for any type of expenditure that is not installed into the house at the time of a scheduled draw.
Remember that each completed stage of the project also needs to increase the market value of the house to maintain the necessary level of real estate security required for the future draws not yet disbursed.
So the amount of available cash you have to work with outside of the your construction loan needs to be managed closely so that you don’t end up in a cash flow pinch in the middle of your project.
One way to approach this issue is to detail out your cash flow for the entire project, and then identify the items that need to be paid for with your own cash versus what can be covered off by your construction loan. By going through this exercise, you will have a much better sense of the related timing of different expenses and the source of funds that will have to be used to cover them off.
One of the common mistakes many construction borrowers make is spending too much of their available cash on things like deposits to trades people and suppliers. While the deposits are going to be required, make sure you negotiate them down as much as possible so as not to unnecessarily use up cash that could have utilized on those items not covered by construction financing.
If you’re not sure whether or not a particular expense will be covered, call your construction mortgage broker and review your cash flow breakdown and timing to make sure there everything is staged properly. If there are issues, better to know them ahead of time so that adjustments can be made to your trade and supplier negotiations.
The key is to conserve your available cash as much as possible and even create a cash flow buffer or contingency to allow for costs that may arise that are unplanned and outside of the scope of your original budget.
The best first step with construction financing is to give me a call so that I can provide you with a free assessment of your construction mortgage options.
And if you’re in the middle of a project and have some unexpected cash flow issues, I would still recommend that you call me so that we figure out a solution together.
Click Here To Contact Joe Walsh, Construction Financing Specialist
About the Author Joe Walsh
I'm a Toronto Mortgage Broker that arranges mortgage solutions on residential and commercial real estate property. With over 30 years of mortgage financing experience, I'm able to quickly assess your financing requirements and provide relevant solutions for your immediate consideration. Joe Walsh Google+ YouTube Channel