A flip can look profitable on the purchase price and the ARV alone, and still lose money once financing is counted. Hard money loans are short term and usually cost more than a standard mortgage, so the loan terms matter as much as the repair budget.
The costs that add up
Interest is usually paid monthly on the loan balance. Points are an upfront fee, where one point is 1% of the loan. Lenders may also charge other fees, and you still pay taxes, insurance and utilities while you hold the property, plus agent and closing costs when you sell. Terms vary by lender, so use the numbers from your own term sheet.
A worked example
Purchase price $150,000, ARV $260,000, rehab $45,000, held 6 months. The loan covers 85% of the price and 100% of the rehab, at 11% interest only with 2 points and $1,500 in other fees.
| Item | Amount |
|---|---|
| Loan ($127,500 + $45,000) | $172,500 |
| Interest ($172,500 × 11% ÷ 12 × 6) | $9,487.50 |
| Points and fees ($3,450 + $1,500) | $4,950 |
| Buying closing costs (2% of price) | $3,000 |
| Holding costs ($900 × 6) | $5,400 |
| Selling costs (6% of ARV) | $15,600 |
| Total cost (price + rehab + all of the above) | $233,437.50 |
| Profit ($260,000 − $233,437.50) | $26,562.50 |
| Cash you put in ($217,837.50 − $172,500) | $45,337.50 |
| Return on cash | about 58.6% over 6 months |
Financing and holding costs (interest, points, fees and holding) come to $19,837.50 in this example. That is money the deal has to cover before you make a dollar.
The 70% rule check
The 70% rule says to pay no more than 70% of the ARV minus the rehab: $260,000 × 70% − $45,000 = $137,000. The example price of $150,000 is above that number, yet the deal still shows a profit because the ARV is high compared with the total cost. The rule is a quick filter, not a promise, and it ignores your actual loan terms. That is why it is worth running the full numbers.
What changes the result the most
Time is the biggest lever. Each extra month adds interest and holding costs. Run the example again with 9 months instead of 6 and watch the profit fall. An ARV that comes in lower than expected has the same kind of effect, so test a conservative ARV too.