Fix-and-Flip Financing: Structuring Short-Term Rehab Capital

Fix-and-flip financing is short-term capital secured by a property you intend to renovate and resell, or renovate and refinance. The structure is remarkably consistent across the industry even though pricing is not: an initial advance against the purchase, a holdback that reimburses renovation work in draws, interest-only carry, and a term measured in months. The economics are decided by three numbers — purchase price, rehab budget, and after-repair value — and by a rhythm most first-time borrowers underestimate: you front the work, then the lender reimburses it. This guide covers how the loans are sized, how draws actually operate, what the capital costs, and the exit math that should be settled before you make an offer. It concerns business-purpose loans on property you will not occupy; where that line matters, we say so.

The three numbers that size every deal

Rehab lenders size loans against two constraints at once, and the loan is capped by whichever binds first.

Loan-to-cost (LTC) measures the loan against what you are actually spending: purchase price plus renovation budget. Lenders commonly advance a large share of the purchase price — often somewhere in the 80-to-90-percent range for experienced borrowers, lower for newer ones — plus up to 100 percent of the renovation budget, held back and released in draws.

After-repair value (ARV) measures the loan against what the finished property should be worth, per an appraisal made "subject to" the proposed renovation. Total loan amounts are commonly capped somewhere around 65 to 75 percent of ARV, varying by lender, market, and borrower experience.

The interaction is where deals surprise people. With round numbers: purchase $200,000, rehab budget $50,000, projected ARV $320,000. An 85-percent advance on the purchase plus full rehab funding suggests a $220,000 loan. A 70-percent ARV cap allows $224,000, so the cost constraint binds and there is slack. Now mark the ARV down to $300,000: the cap drops to $210,000, ARV binds, and $10,000 of budget you expected the lender to fund is suddenly yours to bring. Running both constraints before you offer is the core discipline. The deals that fall apart at closing are commonly the ones where the borrower ran only one.

Experience moves everything. Lenders commonly tier advance rates, pricing, and even eligibility by verified completed projects — tier shapes like zero, one to two, three to nine, and ten-plus are typical — and verification means settlement statements or equivalent closing records, not a conversation. If you are counting on experienced-tier terms, know exactly which documents prove your tier before you apply.

Anatomy of the loan: initial advance, holdback, and carry

At closing, the lender funds the initial advance against the purchase price. The renovation budget is not wired to you. It sits as a holdback — committed but undisbursed — and is released as work is completed and verified. You pay interest-only during the term. Terms commonly run about twelve months, with six-to-eighteen-month variants and paid extensions beyond, and the whole instrument sits in the same short-term credit family we map in /blog/hard-money-vs-bridge-loans.

One pricing structure deserves specific attention because it changes carry cost materially: whether interest accrues on the full committed amount from day one (called "Dutch" interest in industry shorthand) or only on the balance actually drawn ("non-Dutch"). On a loan with a large holdback drawn late in the project, the difference over a several-month hold is real money, and two lenders with identical stated rates can have meaningfully different true costs on this feature alone. Ask directly, and confirm the answer in the note and loan agreement, which will state it.

Draw mechanics: you front the money

The draw process is reimbursement, and this is the single most common operational surprise in the product. The sequence commonly runs as follows.

Funding after a clean inspection commonly takes from a few business days to a week or so, and per-draw inspection and wire fees — typically modest individually — add up across a project with many draws.

The float this creates is yours to plan for. If your contractor requires payment at completion of each phase and the lender reimburses days later, you need working capital equal to at least one full stage of work, and commonly more, because stages overlap. Submit change orders through the lender as they occur; discovering at the final draw that a five-figure scope change was never approved is an expensive way to learn the procedure. Where lenders require lien waivers from contractors at each draw, treat collecting them as part of paying the invoice, not an afterthought.

What the capital costs

The cost stack commonly includes origination points (often somewhere in the one-to-three range, moving with experience and loan size), an interest rate meaningfully above long-term mortgage rates — short-term rehab money is priced for speed, risk, and servicing intensity, and exact levels move with the market — plus appraisal or feasibility fees, draw and inspection fees, and extension fees if you run past term. Some lenders also charge exit fees at payoff; ask specifically, because they hide well in fee schedules.

The right way to compare offers is total cost over your realistic hold, not the headline rate. On a six-month hold, points dominate: two points cost two percent of the loan however briefly you hold it, while a one-point rate difference costs roughly half a percent over six months. On holds past a year, the rate matters more, and the Dutch versus non-Dutch question can outweigh both. Build the comparison on your actual timeline, then stress it by adding sixty to ninety days, because renovations run long more often than they run short.

How lenders underwrite you and the plan

Expect the underwrite to focus on four things. First, the scope of work: a line-item renovation budget, ideally tied to contractor bids, that the lender's reviewer finds plausible against the appraisal's subject-to value; thin or vague budgets get repriced or cut. Second, the ARV itself: the appraisal is made subject to completion of your scope, aggressive comparable selections get trimmed, and the loan is resized when they do. Third, your experience tier, verified in writing. Fourth, liquidity: enough post-closing cash to cover the down-payment gap, carry, contingency, and draw float. Lenders commonly test this, and you should test it harder than they do.

Credit matters less than on long-term loans but is not ignored; minimum scores commonly gate eligibility and nudge pricing rather than drive the deal. If the project is closer to a rebuild than a renovation — foundation work, additions, structural reconfiguration — some rehab lenders will decline it as out of scope, and the deal belongs in ground-up territory; the underwriting there is different enough that we cover it separately in /blog/construction-loans-for-investors.

Exit math: decided before you buy

A rehab loan is a bridge to one of two exits, and the loan should never close without both being penciled.

The sale exit: run a net sheet at your realistic sale price, not your hoped-for one — commissions, transfer costs, seller concessions, carry through the marketing period, and the loan payoff including any exit fee. What remains is the project's actual profit, and it is commonly thinner than the purchase-price arithmetic suggested.

The refinance exit — the buy-renovate-rent path: the takeout is typically a DSCR loan, and the two tests that bind are value and seasoning. Takeout lenders commonly require a seasoning period, often in the three-to-six-month range from purchase and sometimes longer, before lending against the new appraised value rather than your cost basis; policies vary widely and change. And the refinance must qualify on the property's rent at the takeout lender's terms, not on optimism. Before you buy, run the finished property's expected rent against a realistic takeout payment — our /tools/dscr-calculator does that arithmetic — and stress the rate upward, because you are forecasting a rate months away. The takeout product's mechanics, including how lenders establish the rent figure, are covered in /blog/dscr-loans-complete-guide.

If neither exit clears at conservative numbers, the financing is not the problem. The deal is.

If you intend to occupy the finished property, stop. Everything above concerns business-purpose loans on property you will not live in. If your plan is to renovate and move in, you are in consumer-mortgage territory — renovation products exist there, with different rules, disclosures, and protections — and nothing on this site is advice for that path. Occupancy intent is documented and certified at closing, and misrepresenting it to obtain business-purpose terms is mortgage fraud. Decide which side of the line you are on before you apply, not after.

Common mistakes

• Running the loan-to-cost constraint but not the ARV cap, and discovering the gap at closing.
• Treating the holdback as cash in hand instead of reimbursement, then hitting a working-capital wall at the first draw.
• Ignoring the Dutch versus non-Dutch interest distinction when comparing two similar rates.
• Carrying no contingency line in the scope of work, then funding overruns out of pocket mid-project because the holdback is fixed.
• Booking the sale exit at the top comparable and the refinance exit at today's rate, leaving no room for either to disappoint.
• Letting change orders accumulate without lender approval, then contesting them at the final draw.
• Missing the seasoning clock on the refinance exit and carrying expensive short-term debt for extra months while the calendar runs.

How to verify

• Ask the lender for its advance-rate and ARV caps, in writing, for your verified experience tier — and which constraint binds on your numbers.
• Ask whether interest accrues on the full commitment or on the drawn balance, and confirm the answer in the note and loan agreement.
• Ask for the complete fee schedule: points, draw and inspection fees, extension pricing and conditions, and any exit fee, itemized.
• Ask for the draw procedure in writing: verification method, required documentation per draw, lien-waiver requirements, and stated funding turnaround.
• Ask how change orders are submitted and approved, and what happens to unapproved work at reconciliation.
• Ask which documents establish your experience tier before you count on tiered terms.
• Ask what the extension costs, and what conditions — payment history, taxes current, insurance in force — the lender attaches to granting one.

The governing documents are the note, the loan agreement (the draw and holdback provisions live there), the scope-of-work and budget exhibit, the guaranty, and the fee schedule. Terms discussed on the phone but absent from those documents are not terms of your loan.