The country’s long-term housing deficit is pushing investors toward ground-up construction, and private lenders are providing the fast, flexible capital powering it.
Borrowers who once came to private lenders for fix-and-flip loans are now asking about a slightly different type of financing meant for more sophisticated real estate investors. These investors are eyeing ground-up construction ventures like infill projects, small subdivisions, even build-to-rent communities. What’s driving this surge isn’t just investor ambition but the mismatch in America’s housing market, where headlines about rising inventory coexist with warnings of a record shortage.
Rising Inventory, Persistent Shortage
At first glance, it might seem like the supply problem is easing. In August 2025, active home listings were up about 21% year-over-year, the 22nd straight month of inventory growth. The August 2025 Monthly House Market Trends Report from Realtor.com showed more than 1 million homes for sale nationwide for the fourth month in a row.
But context matters. The same report shows that even with those gains, total inventory remains roughly 13-14% below pre-pandemic averages, with 1.1 million active listings versus about 1.3 million typical before 2020. And the structural shortage hasn’t gone anywhere. Zillow estimates the U.S. is still short 4.7 million homes nationwide. Harvard’s Joint Center for Housing Studies adds that affordability has worsened, with home prices rising 60% since 2019, despite incremental improvements in listings.
“Inventory” measures what’s available today, while “shortage” reflects the cumulative gap between how many homes exist and how many households need them. We’re seeing more listings, but after years of underbuilding, the long-term deficit remains.
Builders Turn to Private Lenders
That shortage is pushing more builders into new developments and into private financing options. Traditional banks have become cautious. They’ve tightened underwriting, slowed approvals, and capped leverage. A bank may finance 60% of a project’s cost, but rarely more. They also require months of review, thick documentation, and rigid draw schedules. For builders holding lots, those delays kill deals.
Private lenders are filling the gap. They provide speed, flexibility, and higher leverage, often funding 75–100% of construction costs. Developers gladly pay a higher rate in exchange for certainty of closing in two weeks instead of three months. Speed, in this market, has real value.
The Evolution of Investor Strategies
Borrowers are evolving too. Many started with flips. But more are now tearing down older homes to build new ones or targeting vacant lots in growing metros. Some are experimenting with accessory dwelling units (ADUs) in California, Florida, and Texas, where local regulations encourage them. Others are building-to-rent, holding homes as income properties rather than selling.
For private lenders, this means structuring loans with flexible exits. Some borrowers will sell immediately, while others will refinance into DSCR loans. Private lenders’ ability to adapt loan products to these strategies makes them indispensable.
Technology Shifts the Equation
Not long ago, private lenders avoided construction loans because they were difficult to manage and require much more in the way of checks and balances to ensure progress stays on track. But technology has shifted the equation.
Digital draw management allows borrowers to submit requests online and track disbursements in real time. Inspection platforms deliver reports in hours instead of days. And machine learning is now underwriting projects, scanning construction budgets, and analyzing comparable sales at a speed no human analyst can match.
Lenders that embrace this technology gain an edge. Kiavi, one of the largest investment-property lenders, launched a construction financing product in 2024 and later appointed two executives to expand it in 2025. Their CEO highlighted the role of technology in enabling them to scale quickly and help developers “create much-needed housing inventory.”
Navigating the Risks
Of course, ground-up construction carries risks. Budgets overrun. Permits stall. Contractors walk away. And market conditions can change. Harvard’s 2025 housing report warns that affordability is deteriorating: Nearly half of households are priced out of median new homes. Builder confidence reflects the challenge. The NAHB/Wells Fargo Housing Market Index sits at 32, a reading well below neutral.
But risk can be managed. The strongest lenders evaluate not just credit but track records and stress-test budgets; they require reserves. Confirming permits and insurance before funding is best practice, if not outright critical. Done right, construction loans can become some of the most profitable, repeatable deals.
The Bigger Picture
The opportunity is enormous. The U.S. needs millions of new homes. Builders are willing. Banks are pulling back. Private lenders are stepping in. Every loan helps narrow the housing gap, however incrementally. And the economics are favorable. Construction loans are larger than flips. They attract repeat borrowers and allow lenders to earn additional income through inspection and draw fees.
Rising inventory may dominate the headlines, but the shortage is still part of the story. That shortage ensures the demand for new housing, and the financing for it, remains strong.
Steps Private Lenders Can Take
So, what can a private lender do to start or improve a ground-up construction loan program? First, deepen their team’s expertise in construction budgets, timelines, and permitting. Second, embrace technology that makes lending faster and more transparent. Third, prioritize speed and certainty, because that’s what builders value most.
Ground-up construction is a response to one of the most pressing economic challenges in the U.S. today. By leaning into this sector, lenders can grow their business and offer a much-needed solution to address a systemic housing and economic challenge.
