Ground-up construction loans for investors, from dirt to done.
A ground-up construction loan funds a build in stages. Money releases as work gets completed and often inspected, and interest accrues only on the balance you have actually drawn, not the whole approved amount.
You either set up a construction-to-permanent loan that converts to long-term financing at completion, or you use a standalone construction loan and arrange a separate take-out (a DSCR or conventional refinance) once the property is finished. The build is appraised off your plans and the projected finished value. This fits experienced investors and builder partners who can carry the project through timeline and budget swings.
Marcus had a lot and a plan, not a building
Marcus, an investor I worked with, owned a vacant infill lot free and clear and had a builder ready to put up a small single-family rental. He did not need a loan against a house, because there was no house yet. He needed money that would show up in pieces as the build progressed.
That is the whole idea behind a ground-up construction loan. The lender is not financing an existing property. It is financing a project: a set of plans, a budget, a builder, and a finished value that does not exist until the work is done.
Marcus's first question was the right one. If there is nothing standing yet, what exactly is the loan secured by, and how does the money come out? The answer is the draw schedule, and once you understand it, the rest of the structure follows.
Construction-to-permanent
One loan that covers the build, then converts into long-term financing when the property is complete. You close once, which means one set of closing costs and one underwriting process up front.
The trade is less flexibility. The permanent terms get set early, so you are committing to that take-out before the build is finished.
Standalone construction loan
A short-term loan that funds only the build. When the property is done, you pay it off with a separate take-out: a DSCR refinance based on the rents, or a conventional refinance.
You close twice, so there are two sets of costs. In exchange you choose the permanent loan later, once you can see the finished property and the rents it actually commands.
How the draw schedule moves the money
Construction money does not land in your account on day one. It releases in stages tied to build milestones.
- 01
The schedule is tied to milestones
The loan is broken into draws that match phases of the build: foundation, framing, mechanicals, drywall, finishes. Each draw is a slice of the total budget assigned to that stage of work.
- 02
Work happens, then money releases
You or your builder complete a phase and request the matching draw. Funds release as the work gets done, not before it, so the loan balance climbs in step with the project on the ground.
- 03
Inspections often gate each release
Lenders frequently send an inspector to confirm a phase is actually complete before funding the next draw. This protects the project, and it is also why your builder needs to keep the schedule moving.
- 04
Interest accrues only on what you have drawn
You are not paying interest on the full approved amount while the lot sits empty. Interest accrues on the drawn balance, so early in the build, when little has released, the carrying cost is smaller and it grows as you draw more.
Appraised on plans and projected value
Because the building does not exist yet, the appraisal works differently from a purchase or a standard refinance.
Figures and structures here are educational and general. What a project can actually support depends on the plans, the budget, the appraised finished value, and the deal. I can't tell you your numbers without seeing the file.
- What the appraiser reviews
- Your plans, specs, and the construction budget
- What value is set
- The projected finished value once the build is complete
- Why it matters
- That projected value frames how much the project can support and shapes the take-out at completion
- Interest during the build
- Accrues on the drawn balance only, not the full approved amount
The construction loan gets you a finished building. The take-out is what turns that building into a long-term hold, so plan the exit before you pour the foundation.
Illustrative framing, not a commitment to lend.
The take-out at completion
When the certificate of occupancy is in hand and the property is rentable, the construction loan needs to be paid off. That payoff is the take-out, and it is the moment the project stops being a build and becomes a holding.
For a rental, a DSCR refinance is a common path. It qualifies off the property's cash flow rather than your personal income, which suits investors who are building a portfolio. A conventional refinance is the other route, qualifying off your income and credit in the usual way.
If you went construction-to-permanent, this conversion is built into the loan already. If you used a standalone construction loan, you arrange the take-out separately, which is why lining up that refinance early matters. The math will tell you which exit the finished rents can actually carry.
Is ground-up the right tool
Construction financing rewards investors who can absorb the swings a build creates.
When it fits
Experienced investors and builder partners who have run projects before, have reserves to cover carrying costs, and can hold the line on a timeline. It fits when the lot, the plans, and the projected finished value line up into a deal that pencils even if the build runs long.
When it does not
A first project with no cushion for overruns, or a budget so tight that a delay or a price spike breaks it. If timeline slippage, budget overruns, or months of carrying cost would sink you, an existing-property purchase is the calmer place to start.
Questions, plainly answered
Related reading
Fix and Flip Financing
The renovate-what-exists cousin of building from dirt.
Read the breakdownHELOC vs HELOAN on Investment Property
How investors tap existing equity to fund the gap on a build.
Read the breakdownTurnkey Properties: An Investor's Masterclass
The buy-it-finished alternative when you would rather not build.
Read the breakdownHave a lot and a plan? Let's pencil the project.
Bring your plans, your budget, and your projected finished value to an Investor Success Coordinator (ISC) and we will walk the structure and the exit together. The math will tell us what the build can carry.
Talk to a Human