Overview

Short-term fix-and-flip loans (often called rehab, bridge, or hard‑money loans) give investors fast access to funds to buy and renovate properties for resale. Lenders focus on the property’s after-repair value (ARV) and the borrower’s exit plan rather than long-term credit metrics. These loans speed closings and fund renovations quickly, but they cost more than conventional mortgages and carry higher holding risk (loan fees, interest, and carrying costs). For context on lender types and risks, see our guide on Hard-Money Loans for Fix-and-Flip Investors: Risks and Costs.

Key terms that change project economics

  • Points (origination fees): charged up front as a percent of the loan amount (1–5% is common). Example: 2 points on a $250,000 loan = $5,000 due at closing.
  • Interest rate: short-term rehab loans often run higher than conventional loans; depending on market and lender, rates commonly ranged from mid‑single digits to low‑teens. Always confirm current offers.
  • LTV / ARV underwriting: lenders frequently use loan-to‑ARV ratios (for example, 70% of ARV) rather than loan-to‑purchase price. This determines maximum borrowing against both purchase and renovation costs.
  • Draw schedule and inspections: renovation funds are typically paid in draws after inspection of completed work.

For how renovation costs are underwritten and managed, see How Renovation Costs Are Underwritten in Rehab Loans.

Stacking financing: why and how investors combine sources

Stacking means using multiple financing sources together to cover purchase, rehab, and holding costs. Common stacks:

  • First-lien hard‑money loan (covers purchase + initial rehab) + private second or rehab line for overruns.
  • Hard‑money loan + contractor/vendor financing for specific scopes.
  • Short-term bridge loan to buy, then a rate-and-term refinance or sale exit.

Stacking raises complexity: lien priority, combined effective cost, and exit timing must align. Track total effective interest and fees across all layers before bidding on a deal. Our article on Hybrid Financing for Fix‑and‑Flip Investors: Combining Loans and Lines covers practical stacks.

Exit strategies and how they affect lender decisions

Lenders want a credible exit. Typical strategies:

  • Resale (flip): renovate and list quickly—fastest exit but market-dependent.
  • Refinance to permanent mortgage (fix-to-perm): if you can stabilize and meet conventional underwriting.
  • Refinance to rental (BRRRR): renovate, rent, refinance to pull equity, and hold as rental.
  • Short-term hold + sale to another investor or bulk buyer.

Match your exit to underwriting assumptions. For example, lenders approving to 70% of ARV expect sale proceeds or permanent financing to cover payoff. See our piece on Exit Strategies for Short-Term Real Estate Loans for comparisons.

Quick cost example (illustrative)

Purchase price: $200,000
Estimated rehab: $50,000
Projected ARV: $400,000
Approved loan (70% ARV): $280,000

  • Funds available to close and rehab: up to $280,000 (may require a down payment or second lien to bridge gaps)
  • Points: 2% of loan = $5,600
  • Monthly interest (assume 10% annual on interest-only basis): ~$2,333
    Total project cost depends on holding time, draw timing, contractor overruns, and closing costs.

Use conservative timelines and add contingency (5–15% of rehab) to avoid shortfalls.

Common mistakes and how to avoid them

  • Underestimating holding costs (taxes, insurance, utilities, and interest). Build realistic monthly carrying costs into the pro forma.
  • Skipping a detailed scope and line-item bid from contractors—this leads to costly change orders and delays.
  • Ignoring lien priority when stacking lenders—second liens can be costly or hard to refinance away.
  • Overreliance on optimistic ARV projections—use comps and get conservative appraisals.

Practical checklist before you close

  1. Confirm approved draw schedule and inspection process.
  2. Get written contractor bids and a contingency buffer.
  3. Understand all fees: points, exit fees, and prepayment penalties.
  4. Verify the lender’s required exit options and timeline.
  5. Model worst-case hold time and resale price.

Taxes and reporting (brief)

Profits from flips are typically treated as ordinary income for active investors, not capital gains, if you sell as part of a business activity—check IRS guidance or a tax professional for your situation (see IRS resources on business income and expenses) (IRS.gov).

Where to learn more and next steps

Professional note: In my 15+ years working with fix‑and‑flip borrowers I’ve seen the projects that succeed have conservative ARV estimates, firm contractor schedules, and a single, well-documented exit. When in doubt, model a longer hold and higher costs.

Disclaimer: This article is educational only and does not replace personalized legal, tax, or lending advice. Rules and rates change; consult your lender, CPA, or attorney before acting. For general consumer financing risks see the Consumer Financial Protection Bureau (cfpb.gov) and for tax treatment refer to IRS guidance (irs.gov).