The Quick Read: Net profit is the after-repair value minus every cost of the deal, and hard money financing is one of the largest cost lines, so it has to be broken into its parts and counted for the whole hold, not just the purchase.
- Resale price minus purchase price is a gross spread, not what you keep.
- Hard money costs come in layers: interest, draw and inspection fees, and extension fees if the project runs long.
- Interest depends on whether the lender charges on drawn funds or the full amount.
- Time is the biggest swing factor, because interest and carrying costs run every month.
- Plan the exit before you close, including a refinance into a DSCR loan if the flip becomes a rental.
Why Resale Minus Purchase Is Not Your Profit
Headline flip numbers are gross. ATTOM’s year-end flipping report put the typical flip at $65,981 of gross profit and a 25.5% gross return, the lowest since 2008 and down from 32.1% the year before. ATTOM defines a flip as an arms-length resale of a property whose previous arms-length sale was within 12 months.
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Those figures do not include rehab, financing, taxes, insurance, transaction costs or carrying expenses. WREN News’ coverage of ATTOM’s later quarterly report says so directly, and shows the typical gross return slipping to 21.5% and gross profit to $60,526. A first-timer who reads that as take-home money will overpay.
The Full Formula
Net profit equals after-repair value (ARV) minus purchase price, rehab, buying costs, holding costs, financing costs and selling costs. ARV drives everything. It comes from comparable sales, and if it is wrong, the margin shrinks or disappears.
Two screens help before you build the full model: the 70% rule and the itemized offer.
The 70% rule says maximum offer equals ARV times 0.70, minus rehab. The 30% gap has to cover buying, holding, financing and selling costs plus your profit. It is quick, and it is only a screen.
The itemized offer is the real number. Start from ARV, then subtract repairs, financing, buying costs, holding costs, selling costs and your profit target. What is left is the most you can pay. Use the 70% rule to decide whether a deal deserves the work, then use the itemized offer to set the price.
Don’t double-count. Holding costs are already inside the 70% rule, so subtracting them again on top of the rule’s result overstates the cost. Cheaper homes often need more room, because some costs are close to fixed. Slower markets may call for a tighter ceiling than 70%.
Every Hard Money Cost, Line by Line
Model hard money as separate lines. Lumping it into one number is the first-timer error.
| Cost line | When it hits | How to model it |
|---|---|---|
| Interest | Monthly, over the hold | Balance × rate × months ÷ 12 |
| Draw and inspection fees | Each time rehab funds are released | Per-draw fee × number of draws |
| Extension fee | If the term runs out before the sale | Usually quoted on the outstanding balance, with interest still running |
| Payoff at exit | At sale or refinance | Principal drawn plus accrued interest plus any exit fee |
Get the lender’s term sheet and draw schedule before you finalize the model. Pricing is outside this article, so the term sheet is where you pull those inputs. Terms vary by lender, property, and experience.
Drawn versus full balance. Rehab funds are released in draws after inspected work. Some lenders charge interest only on funds disbursed. Others charge on the full amount from day one. YieldStack’s worked example shows six months of interest on the same holdback at $9,000 under full-balance interest and $4,725 under drawn-balance interest. That is an illustration from an educational site, but the gap is the point. Ask which structure applies.
What the program allows. On the hard money side, fix-and-flip leverage typically runs 93% of project cost at 5+ completed projects, 90% of project cost at 2+, and 85% of project cost with fewer than 2, with every tier capped at 75% of after-repair value. Up to 100% of the rehab budget funds in draws against completed work. Terms are 6-18 months, interest-only, with no prepayment penalty and no multi-year option. A 620 credit score is the minimum, with additional conditions below 660. All of this varies by lender, property, and experience, and none of it is a commitment to lend.
Holding Costs and the Clock
Carrying costs are taxes, insurance, utilities, HOA dues and lawn care. Add them up per month and multiply by a realistic hold. Loan interest is its own separate line, not part of carry.
ATTOM’s state trends data shows a median of 165 days from purchase to resale. That is about five and a half months before any delay, and it is the median, not the floor. Underwriting your plan to the median means half of deals run longer.
Time-based costs stack. RealEstateSkills’ fix-and-flip formula shows each extra quarter of hold time costs about two points of offer percentage on a mid-priced house under its stated assumptions. Its example moves from about 73% of ARV at a six-month hold to about 69% at twelve months.
The Cash You Actually Need
Draws reimburse spending after the work is inspected. A first-timer needs working cash for phase one, plus a buffer, plus any per-draw fees. Overruns above the agreed budget are the borrower’s to fund, and undocumented funding sources can create problems later if you refinance. On files like these, keep receipts and bank records showing where overrun money came from.
Cash invested matters because it sets your return on cash. Divide net profit by the cash you actually put in, not by ARV. Leverage makes cash-on-cash look very different from profit as a percent of ARV. Track both. Cash-on-cash tells you what your own money earned. Margin on ARV tells you how much room the deal had.
A Worked Walkthrough, in Order
Run it in this order, with your own numbers on a spreadsheet:
1. Estimate ARV from comparable sales.
2. Subtract rehab, buying costs and your target profit to see a screening offer.
3. Add hard money interest on the right balance, draw fees and any extension fee.
4. Add monthly carry multiplied by the hold.
5. Subtract selling costs: agent commissions, closing costs and concessions. RealEstateSkills puts commissions at 5-6% and says rehab, holding, financing and selling together run roughly 20-33% of ARV.
6. Compute net profit, margin on ARV and cash-on-cash.
7. Rerun with a slower sale and an over-budget rehab.
Build three versions: base, slow and over-budget. If the deal only works in the base case, it is a thin deal.
Where the General Rule Breaks
Market variation. National averages hide wide gaps. ATTOM’s earlier quarterly report showed Memphis near 70% gross return while Austin sat near 1%. Use your local comps, not the national number.
Final-draw holdback. Some lenders keep about 10% of the last draw until permits close and the certificate of occupancy issues. Treat it as a common practice to ask about, not a rule.
Longer hold or rental conversion. Hard money terms are short and no extension is automatic. If a flip won’t sell at your price, the fallback is a rental hold. Many investors refinance out of hard money into long-term DSCR financing once the property is stabilized, which Lendmire brokers. The hard money exit refinance path has to cover the hard money payoff, so size it before you close, not after.
On that exit, a DSCR loan on a standard rental typically tops out at 75% LTV on a cash-out and offers a rate-and-term option to a higher ceiling, with about 6 months of seasoning from title recording. A 1.00 coverage ratio is where select programs start, credit generally runs 620 to 700 across tiers, and reserves commonly run about 6 months of PITIA, subject to lender guidelines. Clearing 1.00 compares rent to the payment only. It does not mean positive cash flow after repairs, vacancy and management. Lendmire’s complete DSCR loans guide covers the full mechanics.
Tax. Tax treatment varies; consult a qualified professional.
Key Terms Defined
ARV (after-repair value): The estimated resale value once the rehab is finished, based on comparable sales.
Holdback: The portion of the rehab budget the lender releases in draws after inspected work.
Dutch interest: Interest charged on the full loan amount from the start, including funds not yet drawn.
Cash-on-cash return: Net profit divided by the cash you personally invested.
Carrying costs: Monthly expenses of owning the property during the hold, apart from loan interest.
Seven First-Timer Mistakes
- Treating gross spread as profit.
- Counting interest on the drawn balance when the lender charges on the full amount.
- Forgetting draw, inspection and extension fees.
- Planning to the median hold with no slack.
- Ignoring the cash gap before draws reimburse.
- Subtracting holding costs on top of the 70% rule.
- Having no exit if the flip stalls.
Frequently Asked Questions
Is hard money interest a holding cost?
Count it as its own financing line, separate from carrying costs like taxes and utilities. Keeping them apart shows which lever you can pull: faster work lowers both, but only the lender’s terms set the financing line.
Are points part of the profit math?
Any lender charges beyond interest belong in the financing section of your model. Pull the exact figures from the term sheet. Pricing details are outside this article.
How much cash does a first-timer need?
More than the down payment. Add working capital for the first phase of rehab before a draw reimburses it, per-draw fees, carry, and a buffer for overruns. Leverage tiers vary by experience, and first-time investors qualify at the lower tiers.
What if the sale takes longer than planned?
Interest and carry keep running, and extensions may add fees. Rerun the model with a longer hold, and decide in advance whether you would rent and refinance into a DSCR loan instead.
Which number matters more, margin or cash-on-cash?
Both. Margin shows how much cushion the deal has. Cash-on-cash shows what your own capital earned, which is what you compare across deals.
If you are buying or refinancing a rental property and want to see how the numbers work, Lendmire can help you compare DSCR loan options based on the property income, credit profile, leverage, and investor goals.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage brokerage focused on DSCR investor financing, helping arrange programs through wholesale and investor-lending channels in 41 markets, including Washington, D.C. DSCR loans are evaluated by the lender on property cash flow rather than personal income, subject to lender guidelines, supporting LLC closings and accommodating investors with four or more financed properties. Scotsman Guide Top Mortgage Workplace in both 2025 and 2026.
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References
1. attomdata.com: Year End Home Flipping Report
4. ATTOM Flipping Trends by State
5. RealEstateSkills fix-and-flip formula
6. RealEstateSkills house flipping calculator
7. attomdata.com: Q1 Home Flipping Report
This article is part of Lendmire’s hard money loan program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Can a Two-Project Rehabber Use Gap Funding With Hard Money? · Hard Money Lender Requirements for the Seller of a Flip · Can a First-Time Flipper Fund Payments Inside a Hard Money Loan?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.