Here’s the sentence that catches most first-time flippers off guard:
Your rehab money is not wired at closing.
The lender funds your purchase. The renovation budget sits in a holdback account, released in pieces as work gets completed and verified. Which means you front each phase, then get reimbursed.
Understand this before you sign, or you’ll run out of working capital in month two.
What a Draw Is
A draw is a disbursement of rehab funds after a defined milestone is finished and inspected. You complete work, request a draw, an inspector confirms it’s done, and the lender releases that portion.
The logic is straightforward from the lender’s side: money released before work is completed is money at risk. A borrower who disappears with $75,000 of undrawn rehab funds leaves the lender holding a half-demolished house.
The Draw Process, Step by Step
- Submit your scope of work before closing — a line-item budget mapped to phases.
- Close. Purchase funds disburse. Rehab funds are held back.
- Complete a phase using your own working capital.
- Request a draw, with photos, invoices, and lien waivers from contractors.
- Inspection. Usually a third-party inspector, sometimes a video walkthrough on smaller draws.
- Funds release. On a strong program, 24 to 48 hours after inspection clears.
- Repeat through the final draw.
A Typical Schedule
A $75,000 rehab, structured in three draws:
| Draw | Milestone | Amount |
|---|---|---|
| 1 | Demolition, framing, rough plumbing and electrical | $25,000 |
| 2 | Drywall, HVAC, windows, roof | $25,000 |
| 3 | Kitchen, baths, flooring, paint, finish work | $25,000 |
Some lenders release a small initial draw at closing for materials. Many don’t. Ask.
Why You Only Pay Interest on Drawn Funds
This is the part investors most often model incorrectly — and it works in your favor.
Interest accrues on what’s actually been disbursed, not on the full approved loan amount. So the loan gets more expensive as the rehab progresses, not from day one.
Take a $345,000 loan: $270,000 funded at closing, $75,000 in rehab holdback, at 8.20%. Draws come at months 2, 3, and 5.
| Month | Balance Drawn | Interest |
|---|---|---|
| 1 | $270,000 | $1,845.00 |
| 2 | $295,000 | $2,015.83 |
| 3 | $320,000 | $2,186.67 |
| 4 | $320,000 | $2,186.67 |
| 5 | $345,000 | $2,357.50 |
| 6 | $345,000 | $2,357.50 |
| Six-month total | $12,949 | |
Interest on the full $345,000 for the same six months would be $14,145.
You save $1,196 — modest, but real, and it grows with longer holds and larger rehab budgets. Any calculator that charges interest on the full loan from day one, including our own fix and flip calculator, is giving you a conservative estimate. Your actual interest will come in lower.
The Working Capital Problem
Now the part that hurts.
To collect the first $25,000 draw, you must first spend $25,000. Contractors want deposits. Materials get bought before they’re installed. Permits get paid up front.
So you need liquid reserves beyond your down payment, points, and closing costs. On a $75,000 rehab with three draws, plan to float at least one full draw — $25,000 — plus a cushion for the gap between completing work and receiving funds.
Three ways investors handle this:
- Cash reserves. Simplest. Also the reason experienced flippers keep more liquidity than seems necessary.
- Contractor payment terms. Negotiate net-30 or progress billing that aligns with your draw schedule. Good contractors understand this and will work with you.
- A material draw at closing, if the lender offers one. Ask before you sign, not after.
How to Avoid Draw Delays
Draw turnaround might be 24 to 48 hours after inspection — but inspection happens after your request is complete. Incomplete requests are the real bottleneck.
- Photograph everything, before and after each phase.
- Collect lien waivers from every contractor as you pay them. Missing waivers stall draws more than any other single item.
- Don’t request a draw for partial work. Inspectors verify against your scope. Ninety percent complete gets zero percent funded.
- Match your scope to reality. If you change the plan mid-project, get the change order approved before you build it.
- Schedule inspection early. Book it as you’re finishing the phase, not after.
What Happens If You Go Over Budget
The holdback is fixed at the approved rehab amount. If your $75,000 renovation becomes $95,000, that $20,000 comes from you.
Some lenders will consider a budget increase if the ARV supports it and you’re still within LTV limits. Don’t count on it, and never plan around it.
Build a 10 to 15% contingency into the budget you submit. It’s better to have a scope with slack than to discover mid-project that the lender’s approved amount and your actual cost have parted ways.
Draw Schedules on Ground-Up Construction
The same mechanics, scaled up. Ground-up construction financing uses draws tied to construction milestones — foundation, framing, dry-in, mechanicals, finish — often with more draws and more rigorous inspection.
The working capital demand is correspondingly larger, and the interest savings from paying only on drawn funds are correspondingly bigger.
Before You Close
Ask your lender these five questions, in writing:
- How many draws, and what triggers each?
- Is there an initial draw at closing for materials?
- What’s the turnaround from request to funding?
- Who inspects, and is there a fee per draw?
- Can the rehab budget be increased mid-project, and under what conditions?
The answers determine how much working capital you need, which determines whether you can actually execute the deal you just signed for.
Model the full project with our fix and flip calculator, then read the complete cost breakdown to see how draws fit into the wider picture.
Apply now to discuss your scope and timeline.
Draw structures, inspection requirements, fees, and turnaround times vary by lender and project. Figures above are illustrative. Renovation budgets carry overrun risk, and additional costs are the borrower’s responsibility. Nothing here is a commitment to lend or financial, tax, or legal advice.
