Construction-to-Perm Debt: The Smarter Way to Finance Rehabs

Learning the Hard Way

When I bought my first real estate deal—two duplexes that needed six figures of rehab—I made a costly mistake: I chose the wrong type of debt. I closed with a standard bank loan, thinking I could fund the renovations out of cash flow.

I quickly learned how wrong that assumption was. The rehab costs were far higher than I anticipated, and cash flow barely scratched the surface. Over the next year, I had to dig deep into my own pockets to pay for two new roofs, four new decks, and full interior overhauls. By the time the reno project was complete, every investible dollar I had was trapped inside those duplexes. And because of the prepayment penalties on the loan, refinancing wasn’t an option for years.

I had too much capital tied up in a single deal, and it stayed locked up for far too long. If I were to take on that same project today, I’d structure it very differently. I’d use construction-to-perm debt.

What Is Construction-to-Permanent Debt?

Construction-to-permanent (often called “construction-to-perm”) financing is a single loan structure that funds both the acquisition and the renovations.

At closing, the lender funds the portion needed to purchase the property. The remainder is set aside for construction and released through draws. During the renovation phase, the investor submits draw requests—essentially reimbursement requests for completed work. The lender inspects the property to verify progress, then releases the funds, replenishing the investor’s capital to keep the project moving forward.

Once the renovations are finished and the property meets specific benchmarks—such as receiving a certificate of occupancy, or hitting a minimum debt service coverage ratio—the loan automatically converts into permanent financing. No separate refinance required, and no exposure to changing debt markets in the interim.

Eliminating Refinance Risk

Most investors are familiar with the standard model: take out a loan, fix up the property, then refinance the debt. The problem? That leaves you exposed to market risk.

If interest rates climb, if lenders tighten their credit boxes, or if valuations shift, the refinance you were counting on may not materialize the way you projected. Construction-to-perm avoids that uncertainty. You lock in your long-term rate, leverage, and terms before the first hammer swings.

Full Leverage on Rehab Deals

My mistake with the duplexes was putting 20% down at purchase, then layering in even more of my own cash to cover renovations. By the time the work was complete, my leverage had dropped to about 50%. For a young investor, that was a painful misstep—it locked away too much of my working capital in a single deal.

Had I used construction-to-perm financing, the renovation dollars would have come from the loan itself. Once stabilized, I would have landed closer to 70% leverage instead of 50%, with far more liquidity left to chase the next opportunity. In real estate, that extra flexibility is often the difference between standing still and scaling up.

The Trade-Offs

As powerful as construction-to-perm financing can be, it isn’t without its challenges. A few factors keep many investors from using it:

Slightly Higher Rates. Because projects with heavy renovations carry more risk, lenders typically charge a premium—often 25 basis points or more above standard bank debt.

Organization Required. You’ll need a detailed construction budget before closing, and the lender will hold you to it. You also need to know which contractors will be carrying out the work.

The Draw Process. Reimbursement only comes after you document expenses, submit a draw request, and pass a lender inspection. It’s relatively simple, but it takes time and effort.

Appraisal Risk. These loans require a two-part appraisal: the current “as-is” value and the projected “as-complete” value. If the appraiser selects a “as-complete” value that is lower than your projections, the lender can cut back on your proceeds.

Final Thoughts

My first investment taught me an expensive lesson about using the wrong type of debt. Had I structured the financing differently, I could have conserved my capital and set myself up for faster growth.

Yes, this structure demands more discipline than a simple bank loan. But that discipline often shields you from the bigger risks—the kind that can stall a project or trap your capital for years.

Choosing construction-to-permanent debt won’t be right for every project, but for deals that require significant rehab or repositioning, it can mean the difference between getting stuck and keeping your capital in motion.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in multifamily real estate. Register Here to be notified of available investment opportunities.