Build-to-rent (BTR) means building homes to hold and lease rather than to sell. At the smaller end of the market, a project under $5M is typically three to ten single-family homes, townhomes or a few 2-4 unit buildings, built by an investor or a local builder who wants the rental income afterwards.
The financing follows the life of the project: short-term money to build, long-term money to hold. The art is making the two fit together so the refinance pays off the construction loan without a cash call at the end.
Stage 1: the construction loan
A ground-up construction loan funds the land (or refinances land you already own) and the hard and soft costs of the build. Passy Capital finances construction up to 85% LTC, from $1M to $5M. Interest is paid only on what has been drawn, and the build budget is released in draws after an inspection confirms each stage is complete.
If you already own the land, its value or its cost usually counts toward your equity in the project, which reduces the cash you bring.
Stage 2: the DSCR refinance
When the homes have certificates of occupancy and signed leases, a DSCR loan replaces the construction loan. It qualifies on the debt service coverage ratio, the property's rent against the loan payment, so your personal income and tax returns are not the basis of the decision. Passy Capital's DSCR loans go up to 80% LTV.
Scattered homes are often refinanced one loan per home, which keeps each one sellable on its own. Homes on one site can also be refinanced together, which reduces closing costs but ties the properties to each other.
Construction loan vs DSCR loan at a glance
- Purpose: construction builds the homes; DSCR holds them
- Leverage: construction up to 85% of total cost; DSCR up to 80% of the finished, appraised value
- Qualifies on: construction on the plans, budget, builder and exit; DSCR on the rent against the payment
- Funding: construction in draws as work is inspected; DSCR in one payment that retires the construction loan
- Borrower: a US LLC in both cases, for US and foreign investors alike
What makes the numbers work
The test of a BTR plan is simple: at the end, does 80% of the appraised value of the leased homes, sized so that the rents cover the payment, at least repay the construction loan? If it does, the project refinances cleanly and you keep the homes with your equity still in them. If it does not, you bring cash at the refinance or sell one or two homes to rebalance.
Two things decide that answer and both can be checked before you start: the rents comparable new homes achieve in the area, and the value an appraiser will give a finished, leased home. Build your pro forma on achieved rents, not asking rents.
What the lender needs to start
- Site control: the land contract or deed, zoning that allows the planned homes, and the status of permits
- Plans, specifications and a line-item budget with a contingency
- The builder: a contract with a licensed general contractor or your own track record as a builder
- A rent and value analysis for the finished homes, which is the basis of the exit
- The borrowing entity: a US LLC with its EIN and bank account
Foreign investors and BTR
A non-US investor can finance a BTR project on the same terms, with no US credit history required, through a US LLC. The exit matters even more here because the DSCR refinance also qualifies on the rents rather than on income you cannot document in the US. If you sell the homes later instead, plan for FIRPTA withholding on the sale price.