Build to Rent Loans: How Financing a New Rental Actually Works

A build to rent loan funds the construction of a home, or a small group of homes, that you plan to keep as rentals instead of selling. Money is released in stages while you build. The plan from day one is to move into long-term rental debt once tenants are in place.

Two phases, one plan

Every build to rent deal has a build phase and a hold phase.

During the build, the lender pays out money in draws once work is finished and inspected. Payments are usually interest-only, and many lenders charge interest only on the amount drawn so far.

During the hold, the home is finished, leased and earning rent. The debt is now long-term, often a DSCR loan. DSCR stands for debt service coverage ratio. It compares the monthly rent to the monthly payment, which covers principal and interest along with taxes, insurance and any HOA dues.

One closing or two

Some lenders roll both phases into a single closing, often called a one-time close or construction-to-permanent loan. Others fund the build with a short-term construction loan, and you refinance into a separate rental loan once the home is done and leased.

The two-step route means a second application and a second set of closing costs. In exchange, it can offer more flexibility during the build and lets you size the permanent loan once real rents and rates are known.

At RSC, build to rent follows the two-step route. The build runs on a New Construction loan: 12 months, interest-only, up to 90% of total cost, for builders with 3+ completed builds or 5+ completed projects including a build. The hold is a separate 30-year fixed DSCR Rental loan.

What the lender is really asking

Underwriting looks at the deal through two lenses at the same time:

• Can it get built? Budget, plans, permits, contractor and your cash position.
• Will it rent? Local demand, supportable rent and whether that rent covers the future payment.

A project that passes only one of those tests usually struggles to get approved.

A simple example

Example (illustrative numbers only): An investor buys a lot for $80,000 and budgets $320,000 to build a three-bedroom house. Total project cost is $400,000. The construction loan funds part of that total, with the build money released in draws. Ten months later the home is complete, leased at $2,900 a month and appraised at $500,000. The investor refinances into a 30-year DSCR loan sized off that rent and value, and the new loan pays off the construction balance.

What this means for you

Plan the rental exit before you break ground. Know your target rent, your likely payment on the permanent loan and how long lease-up could take. When the build budget and the rent math point at the same number, the whole project gets easier to finance.

Planning a build to rent project? Send RSC Private Lending your scenario for a term sheet in 24 hours. All loans are business-purpose and subject to underwriting.