Understanding New Construction Loans for Real Estate Investors
Whether you’re building a new rental home or adding units to a multifamily complex, an investment construction loan can provide you with financing tailored to your needs. Read about investment construction loans and how they work below.
What Is an Investment Construction Loan?
Provides financing to build revenue-generating properties
This program helps investors finance the construction of properties that will produce income. This includes single-family rental homes, multi-family apartment complexes, and commercial or mixed-use developments.
Disbursed in phases as construction milestones are met
With an investment construction loan, you don't receive the entire amount upfront. Instead, funds are released in stages, or "draws," that are tied to project benchmarks.
Can be converted or refinanced into a permanent mortgage once the project is complete
Once you reach the final stages of development, this loan can be converted to a traditional financing program. This allows you to base your mortgage on the actual value of the completed property.
What Can an Investment Construction Loan Be Used For
To build residential rental properties
These loans are often used for new single-family rental homes, townhomes, apartment complexes, and other residential properties. Once development is finished, the loan is converted to a traditional mortgage.
To construct new office buildings, warehouses, and other business structures
Investment construction loans may also be used to finance new commercial real estate projects, like business centers, shopping malls, retail stores, call centers and shipping facilities.
To build public spaces
Public access projects, like libraries, sports complexes, and community centers, require specialized design elements and compliance with local zoning regulations.
Pros
- Accommodates multiple property types
- Confirms each stage is completed before moving forward
- Easy transition from short-term to long-term financing
- Opportunity for higher ROI than purchasing existing property
Cons
- May require detailed construction plans and cost breakdowns
- Requires ongoing inspections and appraisals
- Financing may be delayed if construction falls behind schedule
Talk to our mortgage experts today about finding the right loan for you.
Alternatives to a New Construction Loan for Investors
- Investors can access the equity in a current investment property by refinancing into a larger mortgage
- The difference between the old and new loan is paid as cash
- May be used to increase property value with upgrades or to start new commercial construction
- Offers flexible eligibility and underwriting terms for investors with non-traditional incomes or complex financial profiles
- Accepts alternative income verification
- Ideal for self-employed investors
- Jumbo loans can be used to build high-value properties that exceed conforming loan limits
- Ideal for large commercial construction projects or apartment complexes
- Typically requires a detailed financial review
How Do I Know If an Investment Construction Loan Is Right for Me?
You can't find a suitable existing investment property
If your local market doesn't have a move-in ready property that meets your criteria, construction may be more aligned with your goals.
There is high demand for the property you want to build
High demand for a specific type of property can make new construction worthwhile. By targeting a market segment with proven need, you can manage risk and position yourself for a favorable ROI.
The property’s value is expected to increase substantially after construction
If market data shows that a new construction is expected to be particularly lucrative, this can justify the upfront cost and responsibility associated with building from scratch.
When Is the Best Time to Use an Investment Construction Loan?
The best time to use an investment construction loan is when you have a well-defined building plan and your local market conditions indicate a strong demand for the finished property.
You may also want to consider using a construction loan for renovations to an existing property that will generate revenue when complete.
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FAQ
What types of properties can be built with an investment construction loan?
How is the after-construction value (ARV) of a property determined?
The after-construction value (ARV) of an investment property is generally decided by market trends, other similar sales in the area, and the overall scope of the project. Calculating a building’s ARV determines how much financing will be needed to cover materials, labor, etc.
How are funds disbursed during the construction process?
Does an investment construction loan also include the land on which the project will be built?
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