Build-to-rent has a financing problem in the middle. Construction loans fund the build but are not meant to be held. DSCR loans hold the property long term but need it finished and producing income. The handoff between the two is where build-to-rent strategies succeed or stall.
In short: A construction-to-DSCR strategy uses a ground-up construction loan to fund a build from land through certificate of occupancy, then refinances into a DSCR rental loan once the property is complete and leased. The construction loan is sized on loan-to-cost and released in draws. The DSCR takeout is sized on the completed property’s value and the rent it produces. The takeout should be underwritten in principle before the construction loan closes.
Construction loans are sized on loan-to-cost — land plus hard costs plus soft costs — rather than on the finished value. Funds release in draws tied to milestones: foundation, framing, mechanicals, finishes. Interest typically accrues only on what has been drawn, which keeps carrying costs down early in the build and rising as the project progresses.
The DSCR refinance becomes possible at certificate of occupancy, when the property is legally habitable. Whether it becomes practical depends on lease-up. Some capital sources will refinance on market rent supported by comparables; others want an executed lease in hand. That distinction changes the timeline by weeks or months and should be settled before the build starts.
A construction loan is sized on cost. A DSCR refinance is sized on completed value. When the finished appraisal lands above total cost, the takeout can retire the construction loan and sometimes return capital. When it lands at or below cost — which happens in softening markets or on over-improved builds — the refinance may not cover the balance, and the investor brings cash or sells.
The build runs past the construction loan maturity. The finished appraisal comes in under cost. Market rent falls short of the ratio the takeout lender requires. Or the construction lender required a general contractor the investor could not retain. Timeline overruns are the most common of these by a wide margin — padding the schedule is cheaper than an extension.
Construction lending and DSCR lending are different disciplines. Lenders strong on draw administration are not necessarily competitive on long-term rental pricing, and vice versa. Underwriting the takeout separately, across multiple capital sources, means the exit is not hostage to whoever funded the build.
Generally at certificate of occupancy, once the property is legally habitable. Whether an executed lease is required first depends on the capital source — some will underwrite to market rent supported by comparables.
The DSCR refinance may not cover the construction balance. The usual responses are bringing cash to close, placing with a source willing to go to higher leverage, or selling the property instead of holding it.
Typically no. On most construction programs interest accrues only on funds drawn to date, so carrying costs are lower early in the build.
Sometimes, and experience requirements vary considerably between capital sources. An experienced general contractor on the project can offset a borrower’s limited track record with some lenders and not with others.
Planning a bridge or construction exit? Tell us the scenario and we will underwrite the takeout before the first loan closes.
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