Posted about 1 month ago

How Real Estate Investors Fund Fix & Flip Projects

One of the most common things we hear from newer flippers goes something like this: "My lender approved me for 85%, so I figured I just needed the other 15%."

Then closing day gets closer and the real number shows up.

A fix and flip loan covers a lot, but it almost never covers everything. If you're planning your first or next flip, it helps to know exactly where the cash gap comes from before you're under contract.

How Fix and Flip Loans Are Usually Structured

Most flips are financed with short-term, asset-based loans, usually from hard money or private lenders. Here's what's typical right now:

Terms of 6 to 18 months, sometimes up to 24
Interest-only payments
Rates of 9% to 15%, plus 1 to 4 points
Leverage capped by loan-to-cost (LTC), loan-to-value (LTV), and after repair value (ARV), often 65% to 80% of ARV
A required exit, either a sale or a refinance

Lenders focus on the deal more than your W-2. That's great for investors, but those caps are exactly where gaps start.

Quick example: you buy a property for $220,000, budget $60,000 for rehab, and the ARV is $360,000. A lender capped at 75% of ARV will lend up to $270,000. Your total cost is $280,000. You're already $10,000 short, and you haven't paid a single closing cost yet.

What a Flip Actually Costs

Let's walk through a more complete deal. A distressed property in Tampa:

Purchase: $275,000
Rehab: $65,000
ARV: $440,000

Down payment. At 85% financing on the purchase, you bring $41,250.

Closing costs. Loan closing costs often run $6,000 to $14,000.

Carrying costs. Interest, taxes, insurance, utilities, and HOA dues. Say that's $2,400 a month. Six months is $14,400. If the project drags to nine months, it's $21,600.

Rehab overruns. Material delays and surprises behind the walls are normal. A $65,000 budget can turn into $70,000 without much effort.

Reserves. A good rule of thumb is 5% to 10% of the rehab budget, so $3,250 to $6,500 here.

Selling costs. A 6% commission on a $440,000 sale is about $26,400, plus title, escrow, staging, and possible concessions. These usually come out of the sale proceeds, but they need to be in your profit math from day one.

Add up what you need before the sale, and the cash required on this deal could top $80,000. On a deal the lender "funded."

The Lowest Rate Isn't Always the Cheapest Loan

This one catches a lot of people. Compare two lenders on a $300,000 total cost deal:

Lender A: 10% interest, 2 points, 90% LTC. Loans $270,000. You bring $30,000 and pay $5,400 in points.
Lender B: 9% interest, 3 points, 80% LTC. Loans $240,000. You bring $60,000 and pay $7,200 in points.

Lender B looks cheaper on rate, but it costs more in points and needs twice the cash to close. When you're comparing lenders, look at the whole picture:

Rate plus points
LTC, LTV, and ARV caps
Draw schedule and inspection fees ($150 to $350 per draw is common)
Experience requirements
Closing speed
Extension fees and prepayment penalties

Draws are worth a closer look. Most lenders reimburse rehab costs after each phase is inspected, which means you're fronting contractor payments in the meantime. That timing gap is where plenty of flips get stuck.

Ways Investors Cover the Gap

There's no single right answer here. Most experienced investors blend a couple of these:

Cash. Simple, but it limits how many deals you can run at once.

HELOC or home equity loan. Usually cheaper than hard money. A $60,000 HELOC draw at 8% for nine months costs about $3,600 in interest. The tradeoff is that your home or rental is the collateral, so you need a solid exit plan.

Cash-out refinance. Useful if you already own property with equity. Expect seasoning requirements, often at least 6 months on title.

Unsecured funding. Personal term loans, 0% intro APR business credit cards, and working capital lines. No lien on the flip property, and often quick to access. The catch: card stacking usually requires strong credit (typically 700+), and you need a real plan to pay balances down before the promo period ends. Otherwise the rates get ugly fast.

Business lines of credit. Great if you qualify, but many require 2+ years in business and $20,000+ in monthly revenue.

Private money or equity partners. Fast and flexible, and sometimes the right move. Just remember you're either paying interest or giving up part of the profit, and every arrangement should be documented properly with an attorney involved.

We work on this piece at Gap Funded, combining unsecured term loans, 0% business credit cards, and HELOC options alongside whatever primary lender an investor already uses. Whatever route you take, the important part is lining it up before you remove contingencies, not after.

A Few Rules That Keep Flips From Going Sideways

Stick to the 70% rule. Purchase plus rehab should stay under 70% of ARV. On a $400,000 ARV, that's $280,000 max.
Pad your timeline. If your lender gives you six months, plan for nine.
Budget a 10% to 20% buffer on both cost and time.
Use conservative comps. Stick to recent sales, not optimistic list prices.
Have a backup exit. If the sale stalls, can you refinance and hold?
Remember taxes. Flip profits are generally taxed as ordinary income, so the margin needs to hold up after financing costs and taxes.

If the deal only works when everything goes perfectly, it probably doesn't work.

Let's Hear From You

For those of you who've done a few flips: what caught you off guard the most on cash to close? Was it carry, draws, overruns, or something else entirely? And how do you usually cover the gap?