Ground-Up Development
New Construction Financing for Investors
Understanding construction loan financing for investors building residential and small multi-family properties from the ground up.
Construction Loans for Real Estate Investors
New construction financing allows investors to build properties from the ground up, either for resale or long-term rental. These loans are more complex than traditional financing but offer unique opportunities for value creation.
How Construction Loans Work
Funding Structure
Funds are released in draws as construction progresses, not as a lump sum. This protects the lender and ensures money is used appropriately.
Typical Term
12-18 months interest-only during construction, then either balloon payment or conversion to permanent financing.
LTV Calculation
Based on as-completed appraised value or cost, whichever is lower. Typical LTV is 70-80% for experienced builders.
Draw Schedule Process
Construction loans disburse funds in stages as work is completed and inspected:
Draw 1: Land & Foundation
Initial draw for land purchase (if applicable) and foundation work. Typically 10-20% of total budget.
Draw 2: Framing & Rough-In
Frame completed, roof on, rough plumbing/electrical/HVAC installed. Major milestone representing 30-40% of construction.
Draw 3: Drywall & Interior Work
Drywall up, interior finishes beginning. Cabinets, flooring, trim work progressing.
Draw 4: Final Completion
All finishes complete, landscaping done, final inspections passed, certificate of occupancy obtained.
What Lenders Require
Detailed Plans & Budget
Complete architectural plans, engineering, line-item construction budget, and realistic timeline.
Qualified Contractor
Licensed, insured contractor with experience building similar projects. References required.
Builder Experience
Borrower's construction experience matters. First-time builders face higher scrutiny and lower LTVs.
As-Completed Value
Appraisal showing strong as-completed value supporting the loan amount and construction budget.
Borrower Requirements
- Credit score 680+ minimum (700+ preferred)
- Prior construction or development experience
- Strong financial reserves (20%+ of project cost)
- Detailed project plan with timeline
- Permits in place or ready to obtain
- Clear exit strategy (sale or permanent financing)
- Adequate down payment (20-30% of total cost)
Build-to-Rent Strategy
Many investors use construction loans to build rental properties, then refinance into permanent DSCR financing once completed and leased. This strategy allows you to create equity through development rather than just acquisition.
Construction-to-Permanent Timeline
Month 0: Close on construction loan, permits in place
Months 1-8: Construction phase with draw releases
Month 9: Certificate of occupancy, final completion
Month 10: Tenant placed, rental income established
Month 11-12: Refinance into permanent DSCR loan
Common Challenges
- • Cost overruns exceeding budget contingencies
- • Construction delays extending timeline
- • Material cost increases mid-construction
- • Contractor performance issues
- • Permitting or inspection delays
- • Market softening during construction affecting exit value
Success Factors
Successful construction projects require meticulous planning, experienced contractors, adequate contingency reserves (10-15% of budget), and realistic timelines.
Work with lenders who specialize in construction financing and can guide you through the draw process, inspections, and transition to permanent financing.
Finance Your Ground-Up Construction Project
Planning a new construction project? Our construction loan programs provide the funding you need from land acquisition through completion.