When you drive past a new duplex rising on an infill lot, it’s easy to admire the finished product. What most people never see is the financial scaffolding underneath. Ground-up construction loans are the invisible backbone of those projects, funding each stage of the build until the property is ready to lease or sell. For investors, understanding how these loans work is the difference between a profitable new build and a stalled project that bleeds cash.
What Makes Ground-Up Different?
Unlike flips or rehabs, ground-up construction starts with dirt. You’re not just replacing cabinets—you’re building foundation, framing, utilities, and often dealing with city permits and inspections. That’s why lenders structure these loans around draws (funds released after work is verified) and usually require larger contingencies.
Investor Story: Priya’s Duplex
Priya spotted a corner lot in an up-and-coming neighborhood. A bank wanted two years of tax returns, full permits, and would only finance 60% of the project. A private lender offered a 12-month construction loan covering land acquisition plus vertical build, with funds released in eight draws. Priya budgeted a 12% contingency, pre-funded an interest reserve, and got the project built on time. Within a year, she refinanced into a DSCR loan at 75% LTV, pulling most of her equity back out.
Key Loan Mechanics
- Term: 12–24 months (shorter if land is already owned and entitled).
- Structure: Loan-to-Cost (LTC) up to 75–80%, or Loan-to-Value (LTV) at completion up to 70–75%.
- Draws: Typically 6–8 stages, each reimbursing completed work.
- Interest-only: Paid monthly or covered by an interest reserve.
- Builder requirements: Resume, license, and proof of prior projects.
Budget Example (Infill Duplex)
- Land acquisition: $120,000
- Site prep/utilities: $35,000
- Foundation & framing: $145,000
- Roof/exterior: $48,000
- MEP (mechanicals): $80,000
- Interior finishes: $95,000
- Soft costs (permits, insurance, pro fees): $32,000
- Contingency (12%): $39,000
Total project cost: ≈ $594,000
Draw Schedule (Sample)
- Site prep & utilities
- Foundation pour
- Framing complete
- MEP rough-ins
- Insulation & drywall
- Exterior complete
- Interior finishes
- Final punch list & landscaping
Pro tip: Order long-lead items (windows, HVAC units, electrical panels) before you even pour the foundation. Supply chain delays can stall your draw requests and burn months of interest.
Risks & Mitigations
- Permit delays: Pre-clear with city; budget 1–3 months cushion.
- Cost overruns: Add 10–15% contingency; don’t “upgrade” with contingency funds.
- Weather: Build seasonal float into foundation and exterior work.
- Exit squeeze: Stress-test DSCR refi at 1.15–1.20 to be safe.
Exit Options
You’ll need a clear path out:
- Sell: As a spec build to retail buyers.
- Refinance: Into a DSCR loan once units are leased.
Quick Checklist
- Stamped plans & permits in hand.
- Builder resume + insurance.
- Budget with line items + 10–15% contingency.
- Interest reserve funded for at least 10–12 months.
- Exit modeled both as sale and DSCR refi.
Bottom Line
Ground-up construction loans aren’t just about financing—they’re about proving you can execute a plan from dirt to door keys. Get the paperwork right, the draws aligned, and the exits believable, and you turn raw land into an income-producing asset.
