New Construction Loans for Investors: The Basics, Start to Finish

Think of a new construction loan as a short-term loan that pays for building an investment property from the ground up. Instead of handing you all the money at closing, the lender releases it in stages as the work gets done. When the home is finished, you pay the loan off by selling the property or refinancing into long-term debt.

How it is sized

A construction loan is based on two things that do not exist yet: the full cost to build and the value once complete. Lenders look at total project cost, including land, hard costs, soft costs and contingency, and at the after-completion value an appraiser expects. The loan usually has to fit inside limits on both. RSC Private Lending's New Construction program funds up to 75% of the lot and 100% of construction, with the loan capped at 90% of total cost and 75% of after-completion value (ARV).

How the money flows

At closing, the lender may fund part of the lot purchase, or credit the value of a lot you already own. The construction budget sits in a holdback. As the builder finishes stages, like foundation, framing, rough-ins and finishes, you request a draw. An inspector confirms the work, and the lender releases funds for that stage.

Most investor construction loans charge interest only on the amount drawn so far. Early in the build, payments are small. They grow as more money goes out.

How it ends

Construction loans are short. Terms often run around a year to 18 months, sometimes longer for bigger projects. RSC's New Construction loans have a 12-month term. Before the term ends, you exit in one of two ways:

• Sell the finished home and repay the loan from the proceeds.
• Refinance into a long-term rental loan (a DSCR loan, for example) and keep the property. DSCR stands for debt service coverage ratio, which sizes the loan on rent.

These are business-purpose loans for investors and builders, not for a home you plan to live in. At RSC, New Construction loans run from $150K to $6M and require a minimum 680 FICO plus 3+ completed builds, or 5+ completed projects including a build.

Example

Example (illustrative numbers only): An investor owns a lot worth $90,000 and plans a $360,000 build, for a total project cost of $450,000. The appraiser expects the finished home to be worth $600,000. The lender funds most of the build in five draws over nine months. The investor sells at $600,000, repays the loan, and keeps the profit after costs.

What this means for you

Come in with three things nailed down: a complete budget, a realistic after-completion value and a clear exit. Those drive the loan amount, the approval and how smoothly the project runs.

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