Fix and Flip Loans: How Real Estate Investors Finance Rehab Projects

A fix and flip loan is short-term financing for an investor who buys a property that needs work, renovates it, and then sells it or refinances it. These loans exist because a distressed property often cannot qualify for a conventional mortgage, and the timeline to close needs to be fast. Understanding how the loan is structured helps you pick the right deal and protect your profit.

What a fix and flip loan covers

Most fix and flip programs fund two parts of a project: the purchase of the property and the renovation budget. Some programs advance a percentage of the purchase price and reimburse rehab costs as the work is completed. Some structures, including our program, can go up to 100% financing on qualifying deals, which lowers how much cash the investor needs at closing. Whether that level of financing is available depends on the deal, the borrower's experience and credit, and the lender's review.

After-repair value and how lenders size a loan

Lenders often talk about two values. The as-is value is what the property is worth today, in its current condition. The after-repair value, or ARV, is what it should be worth once the renovation is finished. The ARV is estimated from recent comparable sales of similar, renovated homes nearby.

Loan amounts are commonly limited by a percentage of the purchase price plus a percentage of the ARV. Many investors also use a simple rule of thumb while they evaluate a deal: the maximum offer is a percentage of the ARV minus the repair costs. Rules like the 70% rule are a starting point only. They do not replace a real analysis of comparable sales, holding costs, and your own numbers.

Here is a hypothetical example, for illustration only. A property is expected to sell for $300,000 after repairs, and the repairs are estimated at $40,000. Seventy percent of the ARV is $210,000. Subtracting the repairs leaves a maximum offer of $170,000 under that rule of thumb. Your market, your costs, and your target profit may call for a different number.

How the renovation money is released

For the rehab portion, lenders usually release funds in stages called draws instead of handing over everything at closing. The typical process looks like this:

• You submit a scope of work and budget before the loan closes
• After each phase of work is completed, you request a draw
• An inspector or the lender verifies the progress, then funds are released
• The process repeats until the project is complete

Because draws follow real progress, keeping a clean budget and good records helps them move quickly. Delays between requesting a draw and getting paid are one of the most common sources of stress on a flip, so ask a lender how long draws normally take.

Costs and terms to compare

Short-term investor loans cost more than long-term home loans because the lender takes on more risk and the timeline is shorter. Our fix and flip rates start as low as 7% to 8% for qualifying borrowers, depending on the credit profile and the deal. When you compare offers, look at all of these:

• The interest rate and whether interest is paid monthly or added to the balance
• Origination fees, often quoted as points
• Draw fees and inspection fees
• The loan term, commonly measured in months, and the cost of an extension
• Any prepayment terms if you sell early

A lower rate with high fees can cost more than a slightly higher rate with low fees, so compare the total cost over your expected holding period.

Plan the exit before you close

The loan is short, so the exit plan matters as much as the purchase price. There are two common exits:

• Sell the property after renovation and repay the loan from the proceeds
• Refinance into a longer-term loan, such as a DSCR loan, and keep the property as a rental

Have a realistic timeline for permits, construction, listing, and closing. Add a cushion for surprises. Many flips lose money not because the purchase was wrong, but because the schedule slipped and interest kept adding up.

What lenders look at in the borrower

• Credit profile
• Experience with similar projects, or a contractor and team who have it
• Proof of funds for the down payment, fees, and reserves
• The property, the scope of work, and the comparable sales

If you are newer to investing, ask about options. Approvals are case by case, and a strong deal and a strong team can help.

Rates, terms, and approval depend on the borrower, the property, and the lender. This guide is educational and is not a commitment to lend.