Is It Really “100% Rehab Financing” If You Have to Front Every Draw?

Question

I keep seeing loans advertised as covering 100% of the rehab.

But then the actual process is:

You pay the contractor and materials.The work gets completed.The lender inspects it.Then you get reimbursed.

That may still be a good loan, but it doesn’t exactly remove the need for cash. A $70K rehab can require a pretty serious float if your contractor won’t wait for the draw.

When you compare lenders, how much attention do you give to this?

Erik Estrada · Answer

I think it should still be labeled as 100% rehab financing, because technically they are lending you the entire rehab. The model only makes sense.

If they gave you all the money upfront with no guarantees of the work being completed, that's basically an automatic foreclosure/default risk. There is nothing guaranteeing the work will be done. I have seen it many times where an investor runs out of money by "self-funding" the rehab and then they are scrambling to find another lender to refinance them or give them more money to finish the project.

I think there should be a disclaimer regarding the draw fees, reserve requirements & draw schedule/Number of draws permitted. This will help weed out many borrowers that are not ready to take on a fix and flip project.

Truthfully if you do not have cash reserves for holding costs, rehab costs, and a planned exit, there is no reason to even look at purchasing a flip. You are better off selling the contract to an end buyer or saving your money in a stock account..

Jesus Suarez · Answer

Most hard money lenders work that way. They'll finance up to 100% of the rehab, but they release the money in draws after the work is completed and inspected. It's simply how they protect themselves and make sure the funds are being used properly.

I work with private lenders that can do up to 100% of the purchase and rehab, as long as there's enough equity in the deal and the GC has a good track record. Sometimes we can even provide an initial draw at closing to get the project started.

Like everything else, there's a trade-off. The less money you bring in, the higher the interest rate is usually going to be

Jordan Ray · Answer

Absolutely!

Robin Simon · Answer

Yes - this should definitely still be considered "100% Rehab Financing" - 100% is already aggressive and if its just handed out upfront - its not really securing anything (theres no collateral if its TBD).  Having absolutely zero cash during the draw process is pretty big flag TBH

Mike Klarman · Answer

Yeah, so this is one of those things that you don't find out until you've been through one.  If you want to drip and drab your way through draws the project will take forever and you will always be chasing the next draw.  This is an ingredient for a failed project.

How it should work optimally:

You buy a house for 100k on a 85% LTV/100% rehab bridge loan.  The rehab is 75k.

The right way to do it is to have like 30k at least but 40k or even 50k that you will get the rehab going in a big burst.  Materials, labor, and items start getting knocked out week after week and you can do two things at once.  The roof and the kitchen can happen simultaneously, etc. You'll expend this capital and now you apply for a giant draw.  This giant draw gets the workers finished and paid.  Then you apply for the final draw which is your capital back.

That's how you need to do it really.  And learn to manage your own projects without a GC.  Understand the order of operations, the costs, the process.  People always ask how do they get started in REI without money?  Be an expert in project management.

Simcha B Shedrowitzky · Answer

100%!

I am just pointing out that borrowers must be aware that this is common practice by some smaller hard money firms.

They have their pros - but they defenitely have their cons!

Simcha B Shedrowitzky · Answer

Hi Jordan,

That is correct. However you have to be aware that they have very aggresive ARV's, so they end up lending you more than you can refinance, and after six months they raise the interest to 18%, so you get stuck paying hefty monthly payments with no ability to refinance, and after 12 months, it gets even better - 24%!

I defenitely would not recommend falling for that trap!

Christian Wamsley · Answer

Ali — I’d give this a lot of attention, sometimes more than the rate.

“100% rehab financing” usually means the rehab budget is included in the loan, not that the borrower never needs cash during the project.

The real question is: how is the rehab money released?

Before comparing lenders, I’d want to know:

• Is there an initial draw, or is everything reimbursement-based?
• How fast are inspections completed?
• How fast are draws reimbursed?
• Does the borrower need to front materials and labor first?
• Will the contractor work with the draw schedule?

A loan can technically cover 100% of the rehab and still create a cash crunch if the borrower doesn’t have enough float to keep the project moving.

So I wouldn’t just ask, “Do you cover 100% of rehab?”I’d ask, “How much cash do I need to keep the rehab moving between draws?”

That answer matters a lot.

Jordan Ray · Answer

Here in Memphis, the hard money lender I recommend finances 100% of the purchase and 100% of the rehab, and they allow draw requests throughout the renovation, so investors aren't expected to front the rehab costs themselves. That's one of the reasons many investors are able to complete deals with around $10,000 out of pocket instead of needing an additional $50,000-$100,000 sitting in reserves for construction. Happy to connect you with them if you decide to invest this way! Feel free to reach out, talk soon!

G. Brian Davis · Answer

A lot of people hear "100% rehab financing" and assume they won't need much cash, but the draw process can make a big difference. I'd want to know exactly how funds are released and whether I have enough liquidity to keep the project moving between draws. Running out of cash in the middle of a rehab can turn a good deal into a stressful one.

Is It Really “100% Rehab Financing” If You Have to Front Every Draw?

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