How Renovation Costs Are Funded in Fix & Flip Loans #

When taking out a fix and flip loan, one of the most important details to understand is how your renovation costs will be covered. Unlike conventional mortgages, these loans are specifically designed to fund both the purchase of the property and the improvements needed to bring it to market-ready condition.

The structure of funding renovation costs can vary by lender, but knowing the process upfront will help you manage timelines and cash flow more effectively.

Common Methods for Funding Renovations #

• Draw Schedule:
  The most common approach follows what is called a draw schedule. This schedule outlines each phase of the project, such as demolition, framing, or final finishes. In practice, the borrower typically covers the cost of the first phase of work upfront.

  Once that stage is completed and verified by inspection, the lender releases funds to reimburse those expenses. The process then continues through each stage of the renovation.

  By funding projects in this way, lenders ensure money is going directly toward completed work, while borrowers have the structure they need to keep projects on track.

• Upfront Construction Holdback:
  In some cases, a portion of the renovation budget is advanced at closing to cover immediate material purchases and early labor costs. This can be useful for quick-start projects where work begins the day after closing.

• Reimbursement Model:
  Less common, but some lenders require you to cover expenses first and then reimburse you after verification. This model works best if you have strong cash reserves or access to a line of credit.

Best Practices for Managing Funded Renovations #

• Build a detailed scope of work before closing to align expectations with the lender.

• Keep receipts and invoices organized to support funding requests.

• Maintain some liquidity to handle upfront costs before the next draw is released.

• Coordinate closely with contractors so the project moves smoothly through inspections and approvals.

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Summary #

Renovation funding in a fix and flip loan is tied to progress. Borrowers often pay for the first stage out of pocket, then receive funds back as each phase is completed and verified. This system keeps financing aligned with actual results and helps ensure projects stay on schedule.