How Developers ACTUALLY Use Debt

Added: 2026-05-28

[00:00:00]Come here, boss. All right, welcome back to the channel. My name is CJ Catcherone, former, you know, tech bro turn real estate developer here in San Diego. We're on site. We're building a 10 unit, five duplexes, and then we're actually converting the garage into another unit. I get asked all the time, how do I afford my projects? How do I finance my flips? How do I finance my developments? And so today, I'm going to walk you through, you know, the different options and ways you can finance these projects. This is Mosie.

[00:00:27]Uh we rescued him like oh we rescued him two weeks ago. He's still a little skittish trying to socialize him a little bit. I got him with my buddy from uh the Netherlands. So most is like a common Dutch dog name. So you have development and flips. Two kind of totally different beasts. Flips are for sure the easiest when we did probably like I think it was like 50 flips over you know twoish years. 95% of those flips and I would say in general are done with hard money. So the way hard money works is it's not like a typical bank where you're going to go through all these, you know, applications and processes and all this extra, you know, stuff. Hard money is pretty simple. If the property appraises, so they'll do up to 70% of loan to value. And then they'll also do sometimes up to 90% loan to cost. So loan to value is essentially them lending based on what they think the value of the property is going to be. And then loan to cost is essentially like your down payment, right? Like how much cash are you putting into the project? because there's I mean I've never really seen any banks that will do 100% loan to cost uh and not require you to bring some capital but some banks will go all the way up to like 90% on loan to cost if it's a good deal you know often times they'll actually rank you so they'll have like tier one tier 2 tier three investors and based on your tier they'll give you you know sometimes better rates lower points higher leverage right so like I've gone all the way up to 90% if it's a really good deal so hard money is the quickest and easiest all you really need is an appraisal Some lenders will look at your credit, some don't. They'll typically ask for like a balance sheet, some of them will just to see what capital you have on hand. It all depends, right?

[00:01:55]Hard money is interesting cuz there's no like true parameters behind it like typical banks. And then the other options for flips are, you know, if you partner with, for example, the seller.

[00:02:04]So maybe the seller has capital and they need someone to do the work. You know, you leverage the equity in the property.

[00:02:10]They put up the capital or you put up the capital to do the rehab. And then you basically create some sort of, you know, artificial purchase price and then you split the profits from there. So I've done that on a few flips, but I'd say, you know, 95% of the time, hard money is kind of the way to go with flips. A lot of flips, the reason why people use hard money also, a lender isn't going to lend on them. Like a typical, you know, bank just because the property is distressed and, you know, it doesn't qualify. But if you have a project that is in decent shape and you have a long enough escrow, you can go and get traditional financing, which is, for example, like, you know, 20% down or you go even get like an FHA loan at like 5% down or even 3%. So, if you have the time and it's in decent shape and it's going to be a longer project, you can go ahead and get a bank loan. But I would say, you know, most of these deals are pretty heavy value ad and you're going to want to probably get a hard money loan, especially if you know you're in a time crunch. Most of what I'm doing these days are, you know, development projects. We have about 10 projects we're vertical on right now. This being one of them. With developments, sometimes they'll come permitted. For example, like this one, we bought this project permit approved. So, we went straight into a construction loan. This construction loan, we're paying 8.75% interest and we paid one point to the lender. We went direct to lender. It's because it was permits approved. I think it was like 75% loan to cost and then it was like 50% loan to value just cuz it was a good deal. But this was permanent approved. So, it's a little bit different. traditional, you know, development deals, if it's pure land, it's it's hard to get leverage. So, sometimes like banks will only lend up like 50%. So, what a lot of times people will do is they'll do seller financing.

[00:03:43]So, they'll essentially put up, you know, maybe 10% 20% down or sometimes they'll just keep it in escrow until permits approved. And what they'll do is they'll keep releasing hard money throughout the process just because the seller doesn't want to go through a yearong escrow and not get anything on their end. Seller financing is a great option if you still have to get permits.

[00:04:02]The other option is if it's like a single family home that you're going to build units on the back on, you could go the traditional bank route, put 20% down, get that thing financed, you know, maybe put a tenant in there till it's permanent approved and either build in the back or knock that house down. But the big deals, seller financing is very common. All right, so you buy a deal.

[00:04:19]Let's use an example. You buy a deal for a million bucks. There's a house on it.

[00:04:23]You go put, say, 25% down. It's going to cost you 25, 50, maybe 100K to get plans done. I don't know. Depends on the project size. you're going to have some carry costs along the way because even if you're able to rent out the main house, it's not going to cover your, you know, principal, interest, taxes, insurance. So, you're going to have to, you know, account for those carry costs.

[00:04:42]Once permits are approved, then you can go ahead and get a construction loan.

[00:04:46]Some people refer those as like bridge loans. They're typically like up to 18 months cuz construction can be as quick as 3 months to a year to two years. It depends again on the deal and how large it is. we'll build this in probably 7 months from putting a shovel on the ground to, you know, having it completed. With construction loans, you can go to some banks. So, if you want a little bit better of rate, but maybe a little bit less leverage, uh, often times you can go to like a typical, you know, credit union. There's different options for that. Or you go to more of like the hard money style bridge lenders, which we did on this, even though we had a decent rate. And they're the ones that will typically allow you to finance all the construction. It'll allow us to bake in interest reserves and they'll sometimes even allow us to put like a staffing budget in there. And so that's typically the products we we leaning towards just because we're building for quicker. But again, you can go bank route, private money route for construction. And then once you actually finish the project, right, project's done, you have certificate occupancy.

[00:05:42]Typically, the lender will want to see at least 70% of the units leased up.

[00:05:48]Like some of the larger banks that have like strict standards and the best rates, they'll sometimes even want like an entire year of rents or 6 months. It all depends, right? It varies. But the lender we're going to use on what's called our takeout loan. So your takeout loan is once the project's complete, this is your permanent loan, right? This is a 30-year term on, you know, probably like a 5year ARM, right? So you're basically locking in your rate for that that period. Like for this project, we'll ideally refinance a little bit of money out and then go into one of these long-term loans, which we're doing run right now on a 15 unit and we're getting uh 5.8% on the takeout loan and it's going to be a cash neutral close. You know, depending how you do on the project, sometimes you can pull cash out, sometimes you have to bring cash in. Again, it depends on the deal.

[00:06:33]>> How do you look good in front of the bank?

[00:06:34]>> Yeah, that's a good question. So, you want to have like the easy button, right? So, once you start doing deals with a lender, it's becomes so much easier, right? They'll have your your file, so they'll kind of have a good idea of, you know, your track record, you know, your personal financial statements. They'll know if you're basically a good borrower or not. 90% of the time, we use the same lender, this project, and a lot of the ones you've seen. But pro tip would be a, you're going to want a construction takeoff, right? So, make that very clear and reasonable because when you submit for your construction loan, that lender is going to go through that construction takeoff and they're going to verify that, you know, it's accurate. It's within scope. And a lot of times I've heard from lenders that that's kind of how they'll tell if it's like a novice investor or a first time like developer because the numbers are like super off.

[00:07:19]So, you want to make sure your construction takeoff is dialed. Also, it helps putting together like a little bit of a deck. So the way I do it is for every deal I'll have what's called a onepager and I'll have my deck. So my one pager is about me, the projects I've done, some pictures of the projects, some numbers about the projects, right?

[00:07:37]The more you can give them to validate, you know, your ability to perform. The second thing would be you went for the other quick summary on the the actual deal, right? So like off Google Maps, I'll grab, you know, where the location is. I feel like brokers and OM you'll see them do a really good job of this.

[00:07:51]Is this kind of what you're doing, but a condensed version? So I'll show where the project is, the location. So if it's like, you know, next to a big school or next to shopping, whatever it be, you know, you want to lean into the value of the project. So I'll include some metrics. I'll use like, you know, AI or whatever for some of this and then I'll include those references. But again, location, some metrics on like the population, for example, like average income is a great one. Like this project, we're right near UCSD, so we're going to get probably a lot of college students in this area. you know, college students pay a premium for rent. And you want to include, you know, some photos of the design of the project, the construction takeoff, like some general summary of the numbers, expected return, your pro form on the project, right? Cuz even though that lender is going to do a appraisal and verify the project, you want to kind of show them that you've done your homework and kind of validate that this is a good project. Because the way it works is when you put together your they call like your package, right?

[00:08:47]Right? When you put together your package, that lender, they're probably going to be working with a broker directly with a salesperson. They're going to take that package and they're going to bring it to either their underwriting team, you know, their committee. And this committee is going to look at the deal. And you want that thing to look crystal clear. You want it to look great. Try to answer any, you know, hesitations ahead of time. You know, the more you do this and the more deals you go through, you'll kind of figure out, you know, what each lender is looking for. Eventually, you'll figure out what lenders are best for what projects. So, like I have a cookie cutter groundup lender, right? I'm buying two hotels downtown right now or offices we're converting to boutique hotels. That's a totally different lender, right? Because this lender has their buy box and that doesn't fit in their buy box. So, again, you want to have different lenders for different projects and you'll eventually get there. But like to actually find these lenders, right, I would say go to meetups. Like lenders, a lot of them make a lot of money and they work hard, they hustle, and I would say meetups is probably the best place to find lenders.

[00:09:43]literally at all of them. You know, there's a ton of agents, there's a ton of lenders, and then I would just ask for referrals, right? So, if you have a friend doing a project or whatever it may be, referrals are probably I would say the second best or just probably equally as good. Yeah. I don't think I would just Google how to find a lender.

[00:09:58]Like, go figure out who's doing the deals locally. Like, if it's like an emergency plumbing leak or something, yeah, I'll call like Bill How or whatever, whoever it is. But, dude, it's this is such a referral business, man.

[00:10:10]And uh the other thing to call out too is like these lenders are your partners, right? So like there's going to be times where you have cost overruns or you know you're in between draws, you need them to go faster cuz the way it works is once you have this this project, they don't pay you until the work's done, right? So like these footings, all of this you see right here, I had to pay for all this out of cost, right? Or out of pocket, sorry. And so once this gets done, then I call the lender. Hey, they come do an inspection. They pay you for the work that's been done. But again, because I have to front all of these costs, you want that lender to be quick.

[00:10:48]And even though lender might have the best terms, they may be a total pain to, you know, get the deal through or they might be a total pain to work with on your construction draws, right? So, like again for me, like this lender, they're not always the absolute best rate, but they're solid, they're consistent, and I can rely on them. And especially with some of these deals that are quick closes, like dude, you don't have the like this project, we closed this escro in like a few weeks, and we don't have the ability. We don't have the ability to like sit there for a month shopping lenders, right? We got to pick a lender and execute. And so, you know, finding the the right lender just makes your job so much easier. All right. Well, hopefully this helpful. there's anything I missed or any questions or any creative ways you guys are, you know, finding ways to get deals done, drop a comment and uh this is good stuff and maybe subscribe.

[00:11:40]>> All right, so CJ's mom made some cookies.

[00:11:44]Dogs.

[00:11:48]Okay, thank you.