How Do You Approach Financing a Flip?
Real Estate Broker · Frankfort, KY · Member since 2019 · 174 posts · 45 votes
Do you determine the purchase and rehab numbers first and then structure financing around the deal?
Or do you establish your financing parameters before seriously pursuing properties?
Curious how other investors approach this.
Hey Linda! I structured a financing game plan upfront that has worked well for us in the past — using private money for the down payment and hard money to finance the rest. Every deal is different, of course, but having that structure in place has helped us get a much better estimate of our out-of-pocket costs going into a deal.
For us, financing is a lower priority when initially evaluating a flip. First, we work through the scope of work and total project costs. If the spread works based on those initial numbers, then we start shopping around to see if we can reduce our carrying and financing costs. That becomes especially important in a higher-interest-rate environment!
Hey Linda! I structured a financing game plan upfront that has worked well for us in the past — using private money for the down payment and hard money to finance the rest. Every deal is different, of course, but having that structure in place has helped us get a much better estimate of our out-of-pocket costs going into a deal.
For us, financing is a lower priority when initially evaluating a flip. First, we work through the scope of work and total project costs. If the spread works based on those initial numbers, then we start shopping around to see if we can reduce our carrying and financing costs. That becomes especially important in a higher-interest-rate environment!
That’s a solid approach. Knowing your financing structure upfront definitely helps give you a clearer picture of your actual out-of-pocket costs. I also like the idea of proving the deal works on the project numbers first, then looking for ways to optimize the financing and carrying costs. Great perspective!
I’m a lender, and I’d get the financing boundaries figured out before making offers. Then price the actual property once you have the purchase numbers and a real rehab scope.
I have calculators I can share with you on rehab costs, and loan terms, fix and flip costs etc. On the private-money down payment mentioned above, I’d get the hard money lender’s okay on that structure upfront. Show them the additional debt, its payments and whether it’s secured against the property. Don’t assume every lender will allow the same setup.
I’d also ask how much rehab cash you need before the first draw comes back. A loan covering the rehab budget doesn’t necessarily mean that money is available on closing day. Those two answers can change how much of your own cash the deal really needs.
Great points. I especially agree with checking the financing boundaries before making offers and confirming how much cash is actually needed before the first rehab draw. Those details can have a big impact on the real cash requirement for a deal. And absolutely, never assume every lender will allow the same structure. Appreciate you sharing this!
Great question, Linda. I believe financing should be considered before seriously pursuing a property. Knowing how much capital you have access to, your borrowing costs, and your available funding options can help you make better decisions when evaluating deals.
From the business funding side, I also think investors benefit from having additional capital available through business lines of credit or other financing options. This can help cover renovation expenses, unexpected costs, or preserve cash reserves for future opportunities.
The key is making sure the financing makes sense for the deal and doesn’t eat away at your profit margins.
I’m curious, are you finding that most investors already have their financing lined up, or are they waiting until they find a property before exploring their options?
I agree! Having a clear understanding of your financing options before pursuing a property can help you move faster and make more confident decisions. I think many investors start exploring financing only after finding a deal, which can create unnecessary pressure. Ideally, you want to understand both your numbers and your funding options ahead of time. Appreciate your insight!
I think understanding your scenario is important. Based on your capital, based on your cost of debt, based on project timelines, based on execution experience.
Everyone should write down their perfect scenario on paper.
In my opinion, that is:
No more than 33% of your total available capital used for the deal
Rehabs that can be completed in under 3 months
Markets that offer active sales trends
Projects that stay under the 70% cost of ARV
Before even thinking about financing, the numbers need to be run. But if you are buying right and you understand rehabs as far as cost/time then you'll tell it's a deal in a minute. If you are consistently buying under market, and you have the experience of knowing rehabs, and you take 10% off the ARV and the numbers still pencil to under 70% project cost to ARV? Then it's a deal. No need for the spreadsheet with a thousand fields.
You are buying a 100k house for 80k, you are running the rehab with your crew and know it's 80k (another investor using a GC would pay more). You handle the money. The Labor. The execution. This requires a know how that can be learned and the ARV says 300k but I'm using 270k for the numbers. So I bought for less, rehab for less and use a low end ARV in the model. if you can still land under 70% project cost modeling this way, it's a deal. Plain and simple.
The problem with most models is that you put an MLS price in there and an inflated GC estimate in for the rehab and you use the top end comps numbers and you get a 74% project cost and you say ok, under 75% is safe and you go for it and then when it comes time you can't get the ARV you get 10% - 15% less and now you're a loser.
That's how it happens. Models are fine if you use real, grounded numbers with a sound sourcing strategy. If you are using hopes and wishes on the spreadsheet then you're going down like the Titanic.
Great breakdown! I especially agree with using conservative ARV estimates and realistic rehab costs instead of relying on best-case scenarios. A deal can look amazing on paper but quickly fall apart when those assumptions are off. Buying right and leaving enough room for unexpected costs is what helps protect the margins. Experience definitely makes a difference, too!
I'd set the financing parameters first, then let the deal numbers prove themselves inside them. Not the loan itself, just the limits.
Before you're making offers, know three things from your lender: the max percent of purchase they'll fund, how much of the rehab they'll cover, and the ARV cap that sits over both. That last one is what actually limits most loans. If you know it's, say, 70% of ARV, your max offer basically falls out of the math before you ever walk the house.
It also tells you your real cash needed: down payment, closing costs, points, and enough to float a draw or two, since contractors usually get paid before the draw reimburses you. A lot of people find the deal first and then learn they're short on that part.
Then every deal gets run against those limits with conservative ARV and a real scope, like others said here.
I'm a lender, for what it's worth, and the borrowers who close fastest are the ones who asked these questions before they had a contract.
From the lending side, financing is one of the first things I look at, not one of the last.
I've seen plenty of deals that look great on paper until you layer in the actual loan structure, carrying costs, points, interest, and required cash to close. That's why I like to know my financing parameters before I get too deep into a deal.
For me, the process usually looks like this:
Understand what leverage is available
Know roughly how much cash I'm willing to bring to closing
Have a target hold time in mind
Know what my expected financing and carrying costs will be
Then I evaluate properties within those parameters.
That said, I don't start with financing and force a deal to fit. The property still has to make sense on its own.
When I look at a flip, I'm focused on:
Purchase price
Rehab budget
ARV
Timeline
Exit strategy
Then I stress-test the financing.
If the appraisal comes in light, the rehab runs over budget, or the project takes a couple extra months, does the deal still work?
The investors I see having the most success usually aren't chasing the maximum leverage available. They're buying deals that work even if a few things don't go exactly as planned.
Financing should support the deal, not create the deal. If the numbers only work because of an aggressive loan structure, that's usually a sign for me to take a closer look.