Ground-up construction financing allows real estate investors to finance projects that do not yet exist as completed properties. Construction loans require a different analysis than stabilized rental financing because the lender is underwriting both the borrower and the execution of a development plan.
What Is a Ground-Up Construction Loan?
Ground-up construction financing is designed for investors developing a new property from the ground up. The lender is financing a project that must progress from land and plans through construction, completion and an exit.
What the Loan May Finance
Depending on the program, financing can relate to land or acquisition basis, hard construction costs, certain soft costs and other approved project expenses. The exact eligible cost structure varies by lender.
How Construction Draws Work
Construction funds are generally released in stages. The borrower completes work according to the approved budget and schedule, submits a draw request and the lender verifies progress before releasing eligible funds. Draw mechanics should be understood before construction begins.
Budget and Contingency
A detailed budget is central to underwriting. Lenders want to understand the cost to complete the project and whether the borrower has sufficient contingency and liquidity for overruns or timing issues.
Plans, Permits and Project Readiness
Lenders may evaluate plans, permits, entitlements, contractor information, schedule and other evidence that the project can proceed. Requirements vary based on project size and lender.
Borrower and Builder Experience
Experience can influence eligibility, leverage and documentation. A lender may evaluate the borrower's completed projects, contractor experience and team strength. Less-experienced sponsors may still have options, but structure can differ.
Value and Leverage
Construction lenders may consider project cost, land basis, as-completed value and other valuation measures. Investors should understand both the cost basis and the projected completed value rather than relying on one metric.
Exit Strategy
A build-for-sale project expects a sale after completion. A build-to-rent project expects stabilization and long-term financing. The exit determines how the construction loan should be sized and how much time the project needs.
Related: Build-to-Rent Financing: A Guide for Real Estate Investors
How Landlord Lending Helps
Landlord Lending helps investors evaluate ground-up construction financing based on project cost, experience, property type, leverage and exit strategy.
Explore the Ground Up Construction Loan program.
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Request Loan TermsFrequently Asked Questions
How are construction funds disbursed?
Typically through draws tied to verified construction progress and the approved budget.
Do construction lenders require experience?
Experience is commonly evaluated, but requirements and structures vary by lender.
Can I refinance a completed rental into DSCR financing?
Potentially, once the property meets the long-term lender's completion, value, income and other requirements.
Does a construction loan cover all project costs?
Not necessarily. Eligible costs and required borrower equity vary by program.