What Investors Need to Know Before Getting Into Ground Up Construction

[Ebonie Beaco]

If you’ve been in real estate for any length of time, you’ve probably felt the shift. Deals that used to make sense at first glance now require deeper analysis, tighter underwriting, and a lot more creativity to produce real returns. That’s exactly why more investors, developers, and even agents are starting to look at ground up construction differently.

Ground up construction gives you something most acquisition deals no longer offer at scale. It gives you the ability to control the outcome. Instead of inheriting outdated rents, deferred maintenance, or poor layouts, you’re creating a product that fits the current market demand from day one. That can mean stronger rents, better tenant profiles, and a more predictable exit if the deal is structured correctly.

But here’s where a lot of people get it wrong. They focus too much on the build and not enough on the foundation of the deal itself. Before you even think about construction costs or contractor bids, the first thing that matters is your land basis. What you pay for the lot sets the tone for the entire project. If you’re too high on the land, it becomes very difficult to recover those margins on the back end no matter how nice the build is. At the same time, you need to understand what comes with that land. Is it already entitled. Are utilities available. Are there any restrictions that limit what you can build. These are the types of details that can quietly turn a good idea into a bad deal.

Right behind that is zoning. This is where real opportunity is either created or missed. You need to know exactly what the city allows you to build, not just what you hope to build. Density, setbacks, parking requirements, and the ability to add additional units like ADUs can dramatically change your numbers. The investors who win in this space are the ones who understand how to maximize the land within the rules.

Once the land and zoning make sense, then you start looking at your numbers from a construction standpoint. That includes hard costs like labor and materials, and soft costs like permits, architectural plans, engineering, and inspections. But what often gets overlooked are the carrying costs. Interest, taxes, and insurance continue whether your project is moving fast or sitting still. Delays are not just inconvenient. They are expensive. Time directly impacts your profitability in ground up construction.

This is also where structuring becomes critical. How you structure the deal from the beginning determines how flexible you are during the build and how strong your position is at the exit. That includes how much leverage you take on, how you phase your draws, how much reserve you keep, and how your financing aligns with your end goal. A well-structured deal can absorb delays, cost overruns, and market shifts. A poorly structured one can fall apart even if the property itself is solid.

Your exit strategy is another piece that needs to be clear from the beginning. Are you building to rent and hold. Are you building to sell. Or are you planning to refinance and pull your capital back out once the property is complete. Each of these paths requires a different approach when structuring the deal. A build to rent strategy may lean toward long term financing like DSCR loans, while a build to sell strategy is more focused on resale comps and buyer demand at the retail level.

Financing is where everything ties together. Ground up construction loans are typically structured around loan to cost and projected value once the project is complete. Funds are released in stages through a draw schedule as construction progresses, and most loans are interest only during the build phase. What lenders are really evaluating is not just the deal, but the execution. They want to see a clear plan, a realistic budget, and either experience or a strong team in place that can deliver the project.

From a lender’s perspective, the strongest deals usually include a well documented construction budget, a licensed contractor, solid comparable sales to support the projected value, and reserves built into the deal for unexpected costs. When those pieces are in place, financing becomes a lot more accessible.

Tip: Always build a contingency of at least 10% to 15% into your total project cost. Construction rarely goes exactly as planned, and having that cushion can be the difference between finishing strong or scrambling for capital midway through the project.

Ground up construction is not just about building property. It is about building a deal that works from the ground up. Every decision you make at the beginning impacts your outcome at the end. The investors who approach this with a clear plan, realistic numbers, and the right structure tend to create opportunities that are hard to find in the traditional market.

If you’re looking at a ground up deal and want a second set of eyes, I can analyze it with you and help you determine if it makes sense and how to structure the financing in a way that gives you the best chance of getting approved and executing successfully.