How Does Build to Rent Financing Compare to Traditional Construction Loans? #
At first glance, Build to Rent loans may look similar to traditional construction loans, since both provide financing for ground-up projects. The difference lies in how the two products handle the transition from construction to permanent financing. Understanding these differences helps investors choose the structure that best fits their long-term strategy.
Traditional Construction Loans #
Traditional construction loans fund the build but require the borrower to secure permanent financing once the project is complete. This often means two separate loans, two sets of underwriting, and two closings. Investors may face duplicate fees for appraisals, title work, and legal costs. In addition, interest rates and lending conditions can change between the time construction starts and when the takeout loan is ready.
Build to Rent Loans #
Build to Rent loans combine both construction and permanent financing into a single one-time-close structure. This eliminates the need for a second closing and saves on costs. Lenders approve the construction budget, timeline, and after-completion value upfront, then seamlessly convert the loan into permanent financing once the project is finished. Because takeout financing is locked in at the start, investors avoid the risk of changing interest rates or shifting market conditions.
Key Differences #
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Build to Rent loans provide a one-time-close structure, while traditional construction loans require a second closing.
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Build to Rent loans reduce costs by avoiding duplicate fees, while traditional loans often involve additional expenses.
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Build to Rent loans offer certainty about long-term financing before construction begins, while traditional loans leave investors exposed to refinancing risk.
Summary #
The main difference between a Build to Rent loan and a traditional construction loan is efficiency. Build to Rent financing streamlines the process into one closing, saving time and money while providing long-term stability. For investors focused on building rental portfolios, this structure offers a clear advantage over the traditional two-step approach.