If the lender “covers rehab,” why do I still need cash upfront?

Question

Something I don’t think new investors understand clearly enough:

A lender can say they cover the rehab, but that doesn’t always mean they hand you the rehab money on day one. If the money comes back through draws after work is completed, you still need cash to get the project moving. Materials, deposits, labor, permits, random early repairs — somebody has to float that before the first draw hits.

For people who use hard money or private lenders, how much cash do you realistically keep available even when the loan includes rehab funds?

Mike Klarman · Answer

If they handed out 100% of rehab funds at closing, the industry would fail.  People are notoriously irresponsible with money.

Mike Grudzien · Answer

If you are going to play the real estate game, even using private money, you need to have some personal funds to demonstrate "skin in the game".  It's not all "sign and borrow".

Jeff S. · Answer

Your title, and some of your other posts, suggest a misunderstanding, @Ali Kalaei. (And maybe some resentment?).  Lenders don’t “cover” your rehab; they reimburse it.   Thus, the answer to the question you posed is you need enough money to pay for everything up until your first construction draw, plus all your other expenses such as interest payments, property taxes, hazard and property insurance, utilities, etc., plus a cushion.

Thanks to many of the self-appointed gurus and coaches, too many people think you can flip or BRRRR a house with little to no money.  This, of course, is not true as you may be learning.  Nor does it have much to do with “skin in the game” because most lenders will require you to initially bring a down payment, to show you have something to lose, as well as enough cash to complete your project.

Erik Estrada · Answer

I would say you'd need 50% of the budget + 6-12 months of payment reserves. The main Issue I see is investors running out of money and ending up selling their project at a loss, taking on very high interest debt, tanking their credit, and ending up with mtg lates.

It's very easy to end up in this situation if you over leverage yourself and don't have the cash to back it up.

Stacy Raskin · Answer

Having enough cash to get the rehab started is important. Depending on the lender, to get the rehab funds back on a draw, there is a draw process where invoices and photos need to be submitted and depending on the lender an in person inspection may be needed.

There are fix and flip loan programs that will pay for up to 90% of the purchase price and 100% of the rehab done on draws depending on property location and borrower credit score. The amount of money to have on hand is usually a factor of the budget and project timeline. The minimum required is not necessarily the minimum the investor should have. How much cash to have on hand will include factors such as the complexity of the project, the experience of the investor and if the rehab team has worked together before- how much knowledge there is on how the contractor works in regards to the project and timeline. Happy to connect to discuss further.

Vijay Friedman · Answer

@Ali KalaeiThat's a great point and something many first-time rehab investors underestimate. Even when rehab funds are included, draws are typically reimbursed after work is completed and inspected, so having liquidity for deposits, labor, permits, change orders, and unexpected repairs is important. The exact amount varies by project, but conservative reserves can make the entire process much smoother.

If the lender “covers rehab,” why do I still need cash upfront?

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