Fix-and-Flip Loans for Real Estate Investors

Fix-and-flip financing is structured differently from a traditional mortgage. Understanding how the process works will help you plan your renovation budget, manage your cash flow, and avoid common pitfalls that delay projects.

Step 1: Purchase Financing. When you find a property and go under contract, the lender finances a percentage of the purchase price at closing. Most fix-and-flip lenders offer up to 85% to 90% loan-to-value (LTV) on the purchase, meaning you bring 10% to 15% as a down payment. The lender evaluates the property's as-is value through an appraisal or broker price opinion (BPO) to determine the maximum purchase financing.

Step 2: Rehab Budget and Escrow. Before closing, you submit a detailed scope of work (SOW) that outlines every renovation item, its cost, and timeline. The lender reviews and approves the budget. Upon closing, the approved rehab amount - up to 100% of renovation costs - is placed into an escrow account managed by the lender or a third-party servicer. These funds are not disbursed at closing; they are released as you complete work.

Step 3: Draw Schedule and Inspections. As you complete phases of the renovation, you request a draw from the escrow account. A third-party inspector visits the property to verify that the work described in your draw request has been completed to an acceptable standard. Once the inspection is approved, the lender releases the funds - usually within 2 to 5 business days. Most projects have 3 to 5 draws throughout the renovation period.

Step 4: ARV-Based Lending. Lenders cap the total loan amount based on the property's after repair value (ARV). A typical cap is 70% to 75% of ARV. This means even if your purchase price and rehab budget qualify for high leverage, the total loan cannot exceed the ARV cap. This protects both you and the lender by ensuring there is enough equity in the deal for a profitable exit.

Step 5: Exit. Once the renovation is complete, you list the property for sale. When the property sells, the loan is paid off from the sale proceeds, and you keep the remaining profit. Alternatively, some investors choose to refinance the renovated property into a long-term DSCR loan and hold it as a rental - a strategy known as BRRRR (Buy, Rehab, Rent, Refinance, Repeat).

Fix-and-flip loans are designed for active real estate investors who acquire properties with the intent to renovate and resell them for a profit. Here are the investor profiles that benefit most from this type of financing:

David finds a distressed 3-bedroom home in Phoenix listed at $250,000. The property needs a full renovation including a new kitchen, updated bathrooms, new flooring, fresh paint, and landscaping. He estimates $75,000 in rehab costs. Based on comparable sales of renovated homes in the neighborhood, David and his appraiser determine an after repair value (ARV) of $425,000.

Here is how the financing breaks down:

The draw schedule is the #1 thing new flippers don't understand going in. Here's the reality: you do not get all the rehab money upfront. Not even close. The lender holds your renovation budget in escrow and releases it in chunks as you finish work. This catches a lot of first-time flippers off guard, and it can create serious cash flow problems if you're not prepared.

Here's how the typical draw process works. You complete a phase of the renovation, like demo and framing, or rough electrical and plumbing. Then you submit a draw request to your lender or loan servicer. The lender sends a third-party inspector to the property to verify the work is actually done. Once the inspector signs off, funds are released to you, usually within 2 to 5 business days. Most rehab projects have 3 to 5 draws total.

This means you need cash on hand to pay your contractor before the draw reimburses you. That's the part nobody warns you about. You're fronting the money for each phase, then getting paid back after inspection. If your contractor wants $15,000 to start demo, that's coming out of your pocket first.

Most lenders fund rehab draws in arrears, meaning after the work is done. A small number of lenders will fund rehab upfront or at closing, but this is rare and typically comes with higher rates or lower leverage. If upfront rehab funding is important to you, let us know. We have a few lender partners that offer it, and we can tell you exactly what the tradeoffs look like.

Bottom line: budget for out-of-pocket costs between draws. A good rule of thumb is to have at least 1 to 2 draw cycles worth of cash available before you start the renovation. If your total rehab is $80,000 spread across 4 draws, keep $20,000 to $40,000 liquid so you never stall the project waiting on reimbursement.

A lot of investors use "fix-and-flip loan" and "hard money loan" interchangeably. They're related, but they're not the same thing. Understanding the difference can save you thousands of dollars and a lot of headaches.

Hard money is a broad category. It refers to any short-term, asset-based loan from a private lender. Hard money loans are typically funded by private individuals, small lending companies, or private equity funds. The collateral is the property itself, and the lender cares more about the asset than your tax returns. Hard money can be used for acquisitions, bridge financing, land purchases, or just about anything real estate related.

Fix-and-flip loans are a specific type of short-term loan structured for one purpose: buying a property, renovating it, and selling it. The key difference is the rehab draw schedule. A true fix-and-flip loan includes a funded renovation budget held in escrow with a structured draw process. Not all hard money loans offer this. Some hard money lenders just fund the purchase and leave you to figure out the rehab costs on your own.

There's also a meaningful difference in pricing. Fix-and-flip loans from institutional lenders (companies that originate hundreds or thousands of these loans per year) tend to have lower interest rates than hard money from private individuals. Institutional lenders typically charge 9% to 12% with 1 to 2 points. A private hard money lender might charge 12% to 15% with 3 to 5 points. The gap adds up fast on a 12-month project.

If you need acquisition capital without rehab financing, a bridge loan might be a better fit. Bridge loans are designed for fast closings on purchases, refinances, and time-sensitive deals without the overhead of a draw schedule. If you need purchase plus renovation funds with a structured rehab process, a fix-and-flip loan is what you want.

At Sinai Capital, we work with both institutional fix-and-flip lenders and select hard money sources. We'll match you with whichever option gives you the best rate and terms for your specific deal.