Build to rent loans require a clear understanding of both project costs and borrower liquidity. Lenders evaluate the total budget to determine how much they can finance and assess whether the investor has enough capital to complete the project. Knowing what costs to include and how much cash you need on hand helps you plan accurately and avoid funding gaps during construction.
What Counts Toward Project Cost #
Lenders typically define project cost as the total amount required to complete the build. This usually includes:
- Land acquisition or lot cost
- Hard construction costs (labor, materials, and contractor fees)
- Soft costs (permits, architectural plans, engineering, surveys, and inspections)
- Utility connections and impact fees
- Contingency reserves
Some lenders may also include interest reserves or closing costs in the total project cost, depending on the loan structure.
How Lenders Use Loan-to-Cost in Build to Rent #
Loan-to-cost (LTC) is one of the primary metrics lenders use to determine how much they will lend. LTC compares the loan amount to the total project cost.
Example: If your total project cost is $500,000 and the lender offers 85 percent LTC, the maximum loan amount would be $425,000.
The remaining $75,000 would need to come from the borrower in the form of equity or cash.
Liquidity and Cash Reserve Requirements #
Beyond the down payment or equity contribution, lenders also require borrowers to show liquidity. This ensures the investor can handle:
- Cost overruns or change orders
- Permit or inspection delays
- Interest payments during construction
- Lease-up costs after completion
Liquidity requirements vary by lender and deal size, but most lenders want to see cash reserves that go beyond the minimum equity contribution.
Why Contingency Budgets Matter #
Construction projects rarely go exactly as planned. Lenders expect to see a contingency allowance built into the budget, typically ranging from 5 to 10 percent of hard costs. This cushion covers:
- Unexpected material price increases
- Subcontractor delays or replacements
- Minor scope changes during construction
- Weather-related setbacks
A budget without adequate contingency raises concerns about whether the project can be completed without additional funding.
Soft Costs That Are Often Overlooked #
Investors sometimes underestimate soft costs, which can add up quickly. These may include:
- Permit and plan review fees
- Architectural and engineering expenses
- Surveys and soil reports
- Utility tap fees and impact fees
- Builder’s risk insurance
- Legal and title costs
Leaving these out of the initial budget can create cash shortfalls later in the project.
How Budget Accuracy Affects Loan Approval #
Lenders review the budget closely during underwriting. Projects with incomplete or unrealistic budgets may face:
- Reduced loan proceeds
- Requests for additional documentation or revised bids
- Delays in approval or funding
- Requirements for larger borrower equity contributions
A well-prepared budget supported by contractor bids and third-party estimates improves the chances of a smooth approval process.
Summary #
Build to rent financing requires a complete picture of project costs and adequate borrower liquidity. Lenders use loan-to-cost ratios to determine leverage and expect to see realistic budgets that include hard costs, soft costs, and contingency reserves. Investors who prepare detailed budgets and maintain sufficient cash reserves are better positioned for approval and less likely to encounter funding gaps during construction. If you are planning a build to rent project, reviewing AHL’s loan guidelines can help you understand what budget documentation and liquidity levels to expect.