For real estate investors taking on ground-up construction projects, securing the right financing is just as critical as finding the right piece of land. While many investors immediately think of conventional loans, these aren’t always the best fit for ground-up builds. In fact, hard money loans can offer distinct advantages that help investors move faster, stay flexible, and increase their ROI.
Let’s explore why—and back it up with real-world examples and illustrations.
The Challenges of Ground-Up Builds with Conventional Loans
Conventional loans are designed for stabilized properties or homes ready for resale or occupancy. When it comes to new construction, banks tend to be:
- Slow: Approvals can take 60-90 days or more.
- Strict: They require extensive documentation (income verification, tax returns, project appraisals, builder contracts).
- Inflexible: They only lend on the as-completed value, and often require multiple draws, inspections, and reappraisals along the way.
- Credit-score sensitive: Even small credit blemishes can derail an approval.
This can be a deal killer for investors needing to act quickly on a land acquisition or get shovels in the ground ASAP.
Why Hard Money Loans Shine for Ground-Up Construction
Hard money loans are asset-based loans, primarily focusing on the property, project, and exit strategy—not the borrower’s personal income or traditional financial profile.
Here’s how hard money outshines conventional loans in ground-up scenarios:
1. Speed to Close
Hard money lenders can close deals in as little as 7–14 days, helping investors lock up land deals and start construction fast.
2. Flexible Draw Schedules
Instead of rigid bank-dictated draw schedules, hard money lenders often allow customized draw plans aligned with your project timeline and builder needs.
3. Asset-Focused Underwriting
Hard money lenders care about the project’s value and exit plan, not your debt-to-income ratio or W-2 earnings.
4. Creative Structuring
Need to roll in land acquisition, soft costs, and construction financing? Hard money lenders can bundle these into one loan, something banks rarely do.
5. Less Red Tape
Minimal paperwork, no tax returns required, and often common-sense underwriting decisions based on experience and deal merit.
Example Scenario: Ground-Up Build with Hard Money vs. Conventional Loan
Project: Build a $500,000 spec home on a $100,000 lot
Estimated Build Time: 8 months
Exit Strategy: Sell upon completion
Conventional Loan:
- Approval takes 75 days
- 25% down on land and construction costs
- Requires architect plans, permits, builder contracts, detailed budgets upfront
- Monthly draw requests with inspections
- Interest rate: 7.25%
Hard Money Loan:
- Approval in 10 days
- 15% down payment (lower cash to close)
- Funds land acquisition, soft costs, and construction under one loan
- Flexible draws—contractor-friendly
- Interest rate: 9.5%
Illustration:
Conventional Loan:
[Land: $100k] + [Construction: $400k]
= Total Project: $500k
Requires 25% down: $125k cash out of pocket
Approval time: 75 days
Hard Money Loan:
Funds entire $500k project
Requires 15% down: $75k
Approval time: 10 days
The Investor Advantage
Even though the hard money loan has a higher interest rate, the speed, lower upfront cash requirement, and flexible draws allow the investor to scale faster, manage cash flow better, and seize more deals.
In fact, savvy investors often roll their hard money loan into a long-term DSCR or conventional loan upon completion, locking in a better rate once the property is stabilized and the risk is reduced.
Final Thoughts
For ground-up construction, hard money loans give real estate investors the agility they need to compete in today’s fast-paced market. The slightly higher cost is often outweighed by the increased velocity, reduced red tape, and deal-winning speed.
If you’re planning a new build project and want to explore hard money options tailored to your project, reach out today. We can show you how to structure a loan that makes your ground-up project profitable and efficient from day one.