Fix-and-flip financing: structuring the loan around the project

A fix-and-flip loan finances two things at once: the purchase and the renovation. The structure that makes it work — and the carrying costs that make it fail — are both visible on day one if you do the arithmetic.

The structure

A typical loan funds 80% to 90% of the purchase price at closing and 100% of an approved rehab budget in draws, capped at 65% to 75% of the after-repair value. Interest-only payments, a 9- to 18-month term, and a balloon at maturity repaid by the sale. The lender orders an appraisal or broker price opinion with an ARV, reviews your scope of work and contractor bids, and inspects before each draw.

The budget template

Acquisition: price, closing costs (2%–3%), lender points and fees
Rehab: contractor bids plus a 10%–20% contingency
Carrying costs: interest, property taxes, insurance (builder’s risk or vacant-property policy), utilities, HOA dues — for the full expected hold plus two months
Selling costs: agent commissions (commonly 5%–6%), seller concessions, transfer taxes, staging, title
Profit target: many investors use the “70% rule” — pay no more than 70% of ARV minus rehab — as a first filter, then build the real budget

A worked example

ARV $320,000. The 70% rule suggests a maximum all-in of $224,000; with $50,000 of rehab, a purchase price around $174,000. Financing at 11% with 2 points on a $200,000 loan for eight months: points $4,000, interest about $14,700. Taxes, insurance and utilities about $4,000. Selling costs at 7% of ARV: $22,400. Total costs ≈ $174,000 + $50,000 + $4,000 + $14,700 + $4,000 + $22,400 + $5,000 closing = $274,100. Projected gross profit ≈ $46,000 before contingency and income tax. Two extra months add roughly $4,700; a 10% ARV miss removes $32,000. The margin is real but thin — which is the normal condition of this business.

Where flips lose money

An optimistic ARV (see how lenders evaluate ARV).
A rehab budget without contingency, or scope creep.
Slow draws and contractor delays that extend the hold.
Underestimated selling costs and concessions in a softer market.
Permitting surprises: unpermitted prior work discovered mid-project.

Taxes

Flip profits are generally ordinary income (often subject to self-employment tax), not capital gains, because the property is inventory. Budget roughly a third of the projected profit for taxes and talk to a CPA before the first project.

Frequently asked questions

Do I need experience to get a fix-and-flip loan?

Most lenders lend to first-timers at lower leverage and higher pricing, and many want to see a licensed contractor on the project. Three completed flips unlock the better tiers at most lenders.

Can the loan cover 100% of everything?

Rarely. Expect to bring 10% to 20% of the purchase price, closing costs, and some of the rehab upfront (draws reimburse completed work). Some lenders allow a second lien or gap funding from a private investor.

What if the flip does not sell?

Extend the loan (at a cost), cut the price, rent it and refinance into a DSCR loan, or sell to another investor. Plan the fallback before you buy — see exit strategies.