Purchase plus rehab
Fix and Flip Loans
One loan for the purchase and the work. The rehab money sits in escrow and comes out as the job passes inspection.
There are two kinds of rehab deal. The one where you bought right, priced the work honestly, and the timeline holds. And the one where the profit was thin on day one and every surprise came straight out of it.
The financing is the same either way. The difference is whether anyone stress-tested the deal before the money moved. That is the part I actually help with.
Two ways to structure it
Lender-funded rehab
The rehab money is part of the loan. It sits in escrow and is released to you on a draw schedule as inspections confirm the work is done. Your cash stays in your pocket, which is how investors run more than one project at a time.
Costs: the inspections and draw fees are collected from you at closing, and interest is often charged on the full loan amount from day one, including the rehab money you have not touched yet.
Borrower-funded rehab
You pay for the work. The loan covers the purchase. Your money is tied up, but the loan is smaller and cheaper, and the file is simpler.
The lender still approves the budget, the plan and the contractor, and still checks on progress with photos, status updates and inspections.
What gets approved before you close
This trips up first-timers. It is not just you and the property. It is also:
- The budget, line by line. Soft costs like plans, permits and entitlements are usually acceptable when they are in the budget.
- The scope of work.
- The contractor or operator.
Change any of the three mid-project and expect a conversation, not a rubber stamp.
The profit test
Most rehab lenders run some version of this:
(After-repair value × 85%) − (acquisition cost + rehab cost)
and want a real number left over. Around $15,000 is a common floor.
Come in under it and two things happen. Your leverage is reduced, commonly by five percentage points of loan-to-cost. And you are asked for a written explanation, with documentation, of how you will cut costs or improve the return. Those are reviewed one at a time, not automatically approved.
I would rather run this math with you before you are in escrow.
Leverage, honestly
Some programs will go to 100% of loan-to-cost when you qualify on an as-is basis, meaning you bought far enough under market that the appraisal carries it. That is real, and it comes with a requirement: a written explanation of how you got the property below market.
It is not the normal case. Plan your cash around the normal case.
Your exit, decided on day one
Selling. The profit test above applies, and your timeline needs to survive a slow market, not just a fast one.
Keeping it as a rental. This is BRRRR. The underwriter confirms at the start that you will qualify for the permanent loan at the end, on credit, leverage, loan size and whether the rent covers the payment. Get that confirmation in writing before you start demolition. DSCR loans.
First deal?
It is harder, not impossible. Expect more scrutiny on your contractor, tighter leverage, and more interest in your reserves. Some programs require a track record of completed projects for their best terms.
The way through is a conservative first deal with real margin in it, not a thin one you talked yourself into. I will tell you which one you have brought me.
Related
- Bridge loans when the property needs little or no work
- New construction loans for ground-up
- All investor loans
Run the numbers first
The Passive Income Property Analyzer has a fix-and-flip section. Use it before you call me, and bring me the output.
Questions people ask
What is the difference between lender-funded and borrower-funded rehab?
Lender-funded means the rehab money is inside the loan, held in escrow, and released to you in stages as inspections pass. Borrower-funded means you pay for the work yourself and the loan is smaller. Lender-funded preserves your cash. Borrower-funded usually costs less in interest. Which one is better depends on how many deals you want running at once.
Can I finance part of the rehab budget and pay for the rest myself?
Not as a way to reduce the money needed for the purchase. Lenders specifically block that structure. Anything in the budget you are not financing generally has to be completed before the first draw is released.
Do I need a licensed contractor?
The budget, the scope of work and the contractor or operator all get approved by the lender before closing. Requirements are stricter for first-time investors. If you are doing the work yourself, say so early, because it changes the file.
How much profit does the deal need to show?
A common test is after-repair value multiplied by roughly 85%, minus your acquisition cost and your rehab cost. Many lenders want to see at least $15,000 left over. Below that, leverage gets cut and you will be asked to explain in writing how the numbers still work.
Can I keep the property as a rental instead of selling?
Yes, and that is the BRRRR strategy. The underwriter will want to confirm at the start that you can qualify for the long-term rental loan at the end, based on your credit, the leverage and whether the rent covers the payment.