Investing in Construction Loans: two case studies

As mentioned in previous case studies, we're sharing some details around specific loans that we're funding and passing onto investors to invest in. 

Here are two of the most recent loans in the Construction Loans Investment Class.

Case study 4

Investment class: Construction Loans

Funding the hold of land in Forrest Hill, Auckland

This loan value is $1.530m, with an LVR  (loan-to-value ratio) of 80%. The loan is secured with a first mortgage over the house and land, and is for a period of 12 months. The borrower plans to develop this piece of land in the future, and will use this 12-month period to get consent in place. 

It’s important to note that Squirrel is not funding the future development, we’re providing the bridge to help the borrower get to that point. Squirrel’s credit policy deliberately removes medium and large scale residential development as this has a far higher risk profile than what we’re comfortable presenting our investors with.

The borrower is a property consultant, and has been involved in the industry for over 40 years. With many successful developments under his belt, he has a great eye for property. 

The loan drew down mid-December 2020, and was placed on the Squirrel marketplace for investors in the last week of January. There is a clear exit plan once the development consents are in place.

This loan falls inside all our credit policy parameters. This borrower has also provided a personal guarantee on the loan. This means the lending is in the name of an entity (business or trust), however there is someone standing behind the loan (typically a director/trustee) who has guaranteed that the loan will be paid back at a personal level.

Case study 5

Investment class: Construction Loans

Funding a single property subdivision and build of four townhouses, Auckland

This loan was funded originally in February 2020 and is next in line for Squirrel’s market place. The loan is being used to fund the sub-division and subsequent build of four townhouses. The loan limit is $1.56m, with an LVR on completion of 60%. The loan is being progressively drawn down as the build progresses and value grows. This property is in a desirable area with high demand for new dwellings.

This loan meets Squirrel’s credit policy and demonstrates the outer limits of what Squirrel will fund from a development perspective. The low LVR, location, and experience of the borrowers contributes to our view that this is a quality loan. We’ve conducted a site visit, and have been impressed with the quality of the build and the construction company running the project. The build is on a fixed price contract.

The loan is expected to mature in August 2021 (and could mature earlier), and a personal guarantee is in place from the borrowers, with a first mortgage in place over the property.

For construction loans like this, Squirrel requires evidence of the build progress before advancing progress payments. This evidence typically includes photos, council compliance documents, and invoices from contractors. Coupled with site visits, this gives us comfort that we only advance money as value is created.

This loan will be listed as soon as the current Construction Loan has been passed through to Retail investors. We expect this to be at the end of this week or early next week.

All Construction Loans have the support offered by our Construction Loan Reserve Fund which helps to protect investors from loan arrears and loan defaults.

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The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Squirrel shall not be liable or responsible for any information, omissions, or errors present. Any commentary provided are the personal views of the author and are not necessarily representative of the views and opinions of Squirrel. We recommend seeking professional investment and/or mortgage advice before taking any action.

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