Ground-up construction loans are not just a bigger version of a fix & flip loan. They require different underwriting, different draw management, and a different level of project oversight. Done right, they produce some of the highest returns in real estate.
How Construction Loan Draws Work
Construction loans disburse capital in stages tied to project milestones: foundation, framing, rough mechanicals, drywall, finishes, and certificate of occupancy (CO). At each stage, the lender sends an inspector to verify completed work before releasing the next draw. You typically need to have a draw ready to request within 30–60 days of the last draw.
What You Need to Qualify
A construction loan requires a detailed scope of work with line-item budget, a signed construction contract with a licensed general contractor, permits pulled or in process, a 3rd-party appraisal based on completed value (ARV), and typically 20–30% of the total project cost as equity. Prior construction experience significantly improves terms and approval speed.
Land Acquisition + Construction
If you're buying raw land to build on, some lenders will finance the land acquisition and the build under one note. Others require you to own the land free-and-clear before they'll lend on the construction. Knowing this upfront affects your capital stack and deal structure significantly.
Common Mistakes That Kill Construction Projects
Underestimating the budget — add 10–15% contingency to any contractor estimate. Slow permit approval delaying the timeline. GC performance issues causing draw slowdowns. Interest reserve running out before CO. All of these are predictable if you model the project conservatively at the outset.
Always build an interest reserve into your budget. If your loan is $800K at 10.49% for 18 months, that's roughly $105K in interest. That money needs to be in the loan budget or in your operating account from day one.
