Ground-up construction loans for investors: how they work
2 min read
Building new can be one of the most profitable moves in real estate, and one of the most capital-intensive. A ground-up construction loan funds the build in stages so you don't have to bring all the money yourself.
What is a ground-up construction loan?
A short-term loan that funds building a new property from scratch: a single-family home, a townhome project or a small multifamily building. Like a fix and flip loan, it's usually interest only, and construction money is paid out in draws as the build progresses.
What the loan typically covers
- Land or lot: part of the purchase price, or credit for land you already own
- Hard costs: materials and labor
- Soft costs: sometimes architect, engineering and permit fees, depending on the lender
What lenders want to see
- Plans and permits, or a clear path to getting them
- A detailed budget from your builder
- A realistic timeline for construction and sale or lease-up
- Builder experience, since construction is more complex than a renovation
- The completed value, supported by comps for new builds nearby
- Your exit: selling, or refinancing into a long-term rental loan
The biggest risks, and how to manage them
- Delays: permits, inspections, weather and labor shortages all add months. Build extra time into your plan.
- Cost overruns: lumber and materials prices move. Keep a healthy contingency.
- Market changes: a build takes longer than a flip, so the market may shift before you sell. Run your numbers conservatively.
Frequently asked questions
How much do you need down for a construction loan as an investor?
It varies by lender and experience. Many construction lenders fund a large share of the build costs but expect the borrower to contribute equity, often through the land or a cash down payment.
Can I get a construction loan without building experience?
It's harder, but possible if you work with an experienced general contractor or builder and have solid plans, a realistic budget and enough reserves.
How do draws work on a construction loan?
Construction funds are released in stages after inspections confirm each phase of work is complete, similar to rehab draws on a fix and flip. Read how rehab draws work for the details.
Planning a build in metro Atlanta? Tell me about your project.
Written by Jasmine Brown
Jasmine specializes in financing flips, new construction, DSCR, and multifamily nationwide. As an investor, she brings first-hand experience and strategic insights to her clients. Fund your next deal