Should Home Builders Take On Debt? What You Need to Know

Introduction:

Debt is a complicated subject for home builders. While no one sets out intending to run their business on borrowed money, sometimes the temptation—or pressure—arises. But should you ever take on debt as a builder? In this blog post, Jon Markee, your Builder CPA, unpacks the scenarios where debt may be justified and where it could put your business at serious risk.

When You’re Building for a Specific Homeowner

If you’re building a custom home for a client, you should never be in a position where you’re fronting the money for their project. It’s their house, their investment, and their responsibility to provide the funds.

Instead, protect yourself with one of these strategies:

• Collect a deposit upfront and only work off the homeowner’s money.

• Require progress payments when funds run out before moving forward.

• Use a separate project bank account that the homeowner can monitor for transparency.

The danger in financing a client’s build yourself is that you could lose everything if the homeowner runs out of money—especially at the end of the project when your profit is often tied up in the final payment. Without proper assurance, you risk months of work with no compensation.

When You’re Building on Speculation

Speculative builds (building without a specific buyer in place) operate differently. Here, debt can be a useful tool if managed carefully. Many builders use construction loans or lines of credit to fund these projects. If the numbers work out, it can be a profitable strategy since you avoid the stress of dealing with homeowner demands.

But there are risks:

• Market downturns could leave you with a property that sells for less than expected.

• Carrying costs add up if your project doesn’t sell quickly.

• You need a backup plan to sustain operations if the sale takes longer than anticipated.

Debt in this scenario can be acceptable—but only if it’s well-calculated, backed by a solid plan, and taken at a reasonable interest rate.

Key Factors to Consider Before Taking On Debt

Before committing, ask yourself these questions:

• Profit Margins: Do you have a clear, anticipated margin that justifies the risk?

• Team Costs: Do you know exactly how much your team will cost and how you’ll pay them?

• Exit Strategy: What’s your plan if the project doesn’t sell quickly or the market shifts?

• Type of Build: Is this a homeowner-funded build (avoid debt) or a spec build (debt may make sense)?

• Interest Rates: Are you borrowing at a reasonable rate, or will payments eat into your profits?

Final Thoughts

Debt can sometimes be a strategic tool for home builders—but only in the right circumstances. If you’re building for a specific homeowner, you should never finance their project with your own money. If you’re building on speculation, debt may help you seize an opportunity, but it must be carefully planned and managed.

The bottom line: Never shop for debt based only on monthly payments—look at the bigger financial picture.

For more insights on debt and financial strategies tailored for builders, connect with Jon Markee, your Builder CPA.