What is Fix & Flip Financing?
Fix and flip loans are short-term financing solutions designed specifically for real estate investors who purchase distressed or undervalued properties, renovate them, and sell for a profit. Unlike traditional mortgages, these loans are based on the property's After Repair Value (ARV) rather than current value.
These loans typically include both the acquisition cost (purchase price) and rehab funds (renovation budget) in a single loan package, making it easier to fund your entire project.
How the Loan Structure Works
1. Acquisition Funding
The lender provides funds to purchase the property, typically up to 90% of the purchase price. You bring the remaining 10% as down payment plus closing costs.
2. Rehab Funds (Draw System)
Renovation funds are held in escrow and released in draws as work is completed. This protects both you and the lender by ensuring funds are used for actual improvements.
3. Interest-Only Payments
Most fix & flip loans require interest-only payments during the loan term, keeping your carrying costs low while you complete renovations.
4. Exit Strategy
Upon completion, you either sell the property (traditional flip) or refinance into a long-term loan (BRRRR method) to pay off the fix & flip loan.
Understanding the Draw Process
The draw system is how lenders release rehab funds throughout your project. Understanding this process is crucial for managing cash flow.
Submit Scope of Work
Provide detailed renovation budget broken down by category (demo, electrical, plumbing, finishes, etc.)
Complete Work Phase
Finish a portion of the renovation according to your approved scope
Request Draw
Submit draw request with photos documenting completed work
Inspection
Lender sends inspector to verify work completion (usually 24-48 hours)
Funds Released
Approved draw amount wired to your account (typically 1-3 business days)
Repeat
Continue process until all rehab funds are drawn
Pro Tip:Always maintain a cash reserve of 10-20% of your rehab budget. You'll need to pay contractors before receiving draws, and unexpected costs are common in renovations.
Calculating Your Flip Profit
Before committing to any deal, you need to accurately calculate your potential profit. Here's the formula:
Profit = ARV - Purchase - Rehab - Holding Costs - Selling Costs
Example Deal Analysis
| Item | Amount |
|---|---|
| After Repair Value (ARV) | $350,000 |
| Purchase Price | -$220,000 |
| Renovation Budget | -$55,000 |
| Acquisition Costs (3%) | -$6,600 |
| Holding Costs (6 months) | -$12,000 |
| Selling Costs (8%) | -$28,000 |
| Estimated Profit | $28,400 |
This represents an 8.1% return on ARV, or approximately 51% return on cash invested (assuming $55K total out-of-pocket).
The 70% Rule
Experienced flippers use the 70% Rule as a quick way to evaluate deals:
Maximum Purchase Price = (ARV × 70%) - Rehab Costs
Using our example: ($350,000 × 70%) - $55,000 = $190,000 maximum purchase
The deal above at $220,000 purchase exceeds this guideline. While still profitable, it has less margin for error. Experienced investors might take this deal; beginners might pass.
Typical Fix & Flip Loan Terms
| Feature | Typical Range |
|---|---|
| Loan Amount | $75K – $3M+ |
| LTC (Loan-to-Cost) | Up to 90% |
| LTV (Loan-to-ARV) | Up to 75% |
| Rehab Financing | Up to 100% of budget |
| Loan Term | 12-24 months |
| Interest Rate | 10-14% (varies by experience) |
| Origination Fee | 1.5-3 points |
| Credit Score | 650+ (660+ preferred) |
Required Documentation
For the Property
- Purchase contract
- Detailed scope of work (SOW)
- Line-item rehab budget
- ARV analysis with comps
- Property photos
- Insurance quote
For the Borrower
- Loan application
- 2 months bank statements
- Government ID
- Proof of funds for down payment
- Experience resume (if applicable)
- Entity documents (if LLC)
Typical Project Timeline
Total project time varies significantly based on renovation scope, contractor availability, and market conditions. Budget for 4-6 months on average projects.
Exit Strategies
Traditional Flip (Sell)
- List property after renovations
- Pay off fix & flip loan at closing
- Take profit as cash
- Move to next deal
Best for: Quick returns, capital recycling
BRRRR (Refinance & Hold)
- Complete renovations, place tenant
- Refinance into DSCR loan
- Pull out most/all capital
- Keep property for cash flow
Best for: Portfolio building, long-term wealth
Common Fix & Flip Mistakes
Underestimating Rehab Costs
Always add 15-20% contingency to your renovation budget for unexpected issues.
Overestimating ARV
Use conservative comps. Your realtor is not always right about value.
Ignoring Holding Costs
Every month costs money. Factor in interest, taxes, insurance, utilities.
Over-Improving
Don't put in $100K of upgrades in a $200K neighborhood. Know your buyer.
Not Having Cash Reserves
You need money to pay contractors before draws come. Don't overextend.
Skipping Inspections
Always get a thorough inspection before buying, even on a distressed property.