How rehab draws actually work on a hard money gut rehab loan

You're reading it right. On most rehab loans the purchase portion funds at closing and the renovation portion sits as a holdback controlled by the lender. You do the work, then request a draw, then an inspector visits or reviews photos, then the lender releases money for the work that's finished. That is reimbursement, so yes, the first phase of a gut comes out of your own pocket, and the phrase "100 percent of rehab" describes the total the lender will eventually fund rather than money you get up front.

What that means in practice: if your first draw covers demo, dumpsters, rough plumbing and rough electric, you need enough cash to pay those trades and then wait. Draw turnaround varies by lender, commonly a few business days to a couple of weeks, and each inspection typically carries a fee in the low hundreds. Some lenders also hold back a percentage of each approved draw until final completion, which is retainage.

So the cash you need is not just down payment and closing costs. It's down payment, closing costs, the first phase of construction, and the carry during the lag. On a heavy gut with a 120 to 150 day timeline, that lag repeats four or five times.

The piece worth pinning down before you sign anything is what the lender counts as a completed line item, because a draw denied on a technicality stalls your subs, and stalled subs go work elsewhere. Ask for their draw request form and their inspection standard in writing, along with current rates and fees, since those change and vary by lender.

So let me make sure I have this straight. The 10 percent down on purchase is not the real number at all, because on a 150k shell with 90k of work, the demo and rough-in phase alone could be 25 or 30k that I have to have sitting in an account before the first draw clears? That's a completely different pile of money than the one I'd been saving toward.

Yes. That's why gut flips consolidate among people who already have money.

A common pattern on the contractor side is invoicing every two weeks and getting paid whether the investor's draw has cleared or not, since the crew still needs payroll on schedule regardless of where the lender's process stands. When a client says the lender is "processing," that payroll has usually already been floated once, and most contractors will not float it twice. If you are the one borrowing, tell your GC the draw cycle up front and put the pay timing in the contract. The jobs that go sideways are almost always the ones where nobody said out loud how often money arrives.

Read the draw section for three things. Whether the lender requires lien waivers from each sub before releasing, whether there's retainage of 5 or 10 percent per draw, and what happens to the holdback if the loan hits maturity with work unfinished. That last one is where people get hurt on a gut, because the extension fee gets charged on the full note while part of the rehab money is still locked up and unavailable to finish the thing that would let the property sell.

Wait, lien waivers from each sub, every draw? So somebody has to chase paper from six trades five separate times. That sounds like an actual job on its own.