LTV vs LTC vs ARV: How Fix and Flip Loan Amounts Are Calculated
The answer investors want is a number. The honest answer is that it depends on four separate cash needs, and the people who run out of money mid-project almost always budgeted for one of them and forgot the other three. Here is the full list, what the loan covers, and what actually reduces the cash you need.
The four cash needs
The down payment. The gap between the total project cost and the loan. Fix and flip loans are sized against the purchase, the rehab and the finished value, and the tightest test wins. Our fix and flip program publishes up to 85% of the purchase, 100% of the rehab and 75% of ARV, so the portion of the project you fund is whatever those tests leave. If the loan lands at the purchase cap, your contribution is at least fifteen percent of the purchase price.
Closing costs. Points, escrow, title, recording, appraisal or valuation and document preparation, plus transfer costs and the prorations on the settlement statement. These come out of your pocket at closing, not out of the loan.
The carry. Every month the property is not producing income, the interest payment, the property taxes, the insurance and the utilities are yours. Short-term loans are interest only, so the payment is the rate applied to the funds drawn, and it grows as draws are released. Our fix and flip terms run up to 18 months, and the carry is calculated on the months you will actually hold it, including the marketing period after the work is done.
The contingency. The money you have not committed. Renovation budgets are estimates, and estimates on a property you could not fully inspect before purchase are optimistic estimates. A contingency is what turns a discovered problem into an inconvenience instead of a stalled project.
Investors usually plan for the first two. The projects that fail run out of the third and fourth.
What the loan actually covers
A fix and flip loan has two parts. The initial advance funds the purchase at closing. The holdback is the renovation money, held by the lender and released in draws as the work is completed and inspected.
That structure has one consequence everyone should understand before signing. The holdback is a reimbursement, not a float. Work happens, the draw is requested, an inspection confirms it, funds are released. Between the invoice and the release, the money is yours. So a project with a large renovation budget and a slow draw cycle requires more working capital than the headline leverage suggests, even though the total loan is the same.
Ask two questions on every quote. How long does a draw take from request to funding. And is interest charged on the full loan amount or only on funds drawn. The second answer changes the carry materially over eighteen months. Our post on how rehab draws and holdbacks work covers the mechanics properly.
What a lender wants to see
Our published fix and flip requirements are a 620 minimum FICO score, property types of SFR, condo and townhome and two to four units, documentation consisting of an application, a schedule of real estate owned and proof of funds, and first time flippers allowed.
Proof of funds is the one that speaks to this article. The lender is confirming that the cash side of the plan exists, because a fully underwritten loan attached to a borrower who cannot fund their share is a project that stops in month three. Show liquidity you can actually reach, not equity in something you would have to sell.
First time flipper reality
Our program allows first time flippers, which is not the same as pretending the first one is easy. Three honest expectations.
You will be underwritten on the contractor as much as on yourself. A licensed contractor with a written bid and a real track record does a lot of work for a borrower with no history.
Your structure will be slightly more conservative than the published ceiling. That is not a penalty, it is the cushion that makes a first project survivable.
And your timeline will be longer than you think. Permits, material lead times and the marketing period after completion all take real weeks. Build the carry for a project that takes longer than planned, because the first one usually does.
Ways to reduce the cash you need
Equity in property you already own. The most common route. A bridge loan or a second mortgage against an existing property converts equity into the cash for the next project. If the equity is spread across several properties, a blanket or cross-collateral loan can draw on more than one at once.
A partner. Money for a share of the profit. Cheaper in cash and more expensive in outcome, and worth comparing honestly against the cost of debt before you agree to it.
Buying better. The least discussed and most effective lever. A lower purchase price reduces the cost base, which raises the loan relative to the value and lowers what you need at the table. Margin is made at the buy.
A tighter scope. Renovating to what the neighborhood pays for rather than to the top of your taste. Over-improving is one of the reliable ways to convert cash into nothing.
What does not work is looking for a lender who will fund the whole project. That lender does not exist in this market, and the ones who advertise it are usually selling something other than a loan.
Put a number on your own deal
Work through it in this order. Take the purchase price and the contractor’s written budget, and add them for total cost. Apply the published leverage tests and take the lower result for the loan. Subtract the loan from the total cost. Add closing costs. Add the carry for the months you will hold it plus a buffer. Add a contingency on the renovation. That total is the cash the project needs from you.
Then test the exit. Take the finished value from closed comparable sales, subtract selling costs and total project cost, and see whether the margin justifies the work. Our post on LTV vs LTC vs ARV explains how the leverage tests interact.
The fix and flip financing guide walks the full structure, and the auction and Hubzu scenario covers buying flips at auction. When you have a specific property, (619) 617-2797 or the borrow page will get you a real number rather than a range.
