When financing new construction to be used as a real estate investment, you have two primary methods to leverage. The first is for the construction of the property. Your bank’s construction loan will be based upon the plans, specs and costs provided by your builder, less your equity position.

Yournew construction for rental property equity can be in the form of a down payment, a lot you may already own or a combination of either. Construction loans usually require at least a 20 percent down payment to get started.

Once construction has been completed a permanent mortgage must be obtained to replace the construction loan. Both types of loans are approved based upon various factors including credit, down payment and income among other considerations but what construction loans don’t take into consideration is occupancy.

A permanent loan will have a higher interest rate, say about 0.25 percent higher for a property to be used as a rental compared to a home to be used as a primary residence. The construction loan makes no such distinction and is based upon credit, income and down payment alone. If you’re going to keep the property as a rental, your permanent mortgage rate will be slightly higher than what you might see advertised. When banks and mortgage companies advertise their mortgage loans they typically only quote programs for owner occupied properties.

How does a lender know if the property will be for a primary residence or not? First, you tell them. There is a field on the loan application that asks you if the loan is to be used as a primary residence. After the loan has closed a lender may send an inspector to the property later, knock on the door and see who answers. If it’s you, no worries. If it’s a renter, expect a phone call from the bank wanting to adjust your note.