What Private Lenders Actually Look For in a Renovation Budget (Hint: It’s Not Just the ROI)
- Robert Schmalz
- Jan 1
- 4 min read
If you ask a new real estate investor what a Private Money Lender looks for in a deal, they will almost always say the same thing: "High ROI."--- They are wrong.!!
While the Return on Investment (ROI) matters, it is not the primary motivator for a private lender. Remember, a lender is not an equity partner. If you make $100,000 profit on a flip, the lender still only makes their agreed-upon interest rate. They don't get the upside.
Because they don't share the upside, their obsession is downside protection.
When a private lender looks at your renovation budget, they aren't looking for how much money you might make. They are looking for how much money you might lose. Here is how to structure your renovation budget and contractor bids to instantly build trust with lenders and get your deals funded.
1. Specificity is Your Security Blanket
The quickest way to get a loan application denied is to submit a "napkin budget."
If your Scope of Work says: "Kitchen Remodel: $15,000," a savvy lender sees a red flag.
That number is a guess. And guesses lose money.
A professional presentation breaks that $15,000 down:
Cabinets (Material): $6,500
Countertops (Quartz, 45 sq ft): $3,000
Backsplash & Tile: $1,500
Labor (Demolition & Install): $4,000
Why the lender cares: When you present line-item details, it proves you have actual quotes from contractors. It shows the lender that you aren't hoping for the best; you are planning for the reality.
2. The "Contingency" Test
New investors often leave the "Contingency" line item off their budget to make the profit margins look fatter. They think showing a tighter budget makes the deal look better.
In reality, it makes you look like an amateur.
Experienced lenders know that construction never goes exactly to plan. When they see a budget without a contingency fund (usually 10-15%),
they assume you are naive about the risks of flipping.
The Fix: Always include a clear contingency line item in your presentation. It tells the lender, "I know things might go wrong, and I have already allocated the money to fix them so your capital is never at risk."
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3. Proof of Contractor Competence
Your lender is technically lending to you, but in reality, they are betting on your contractor. If your contractor fails, the lender's collateral (the house) sits unfinished and loses value.
When submitting your budget, include a "Contractor Resume" or profile.
Are they licensed and insured?
Have they done projects of this size before?
Do you have a signed contract with them?
A lender feels infinitely safer releasing $50,000 for a renovation when they know a verified professional is swinging the hammer.
4. The Draw Schedule Alignment
We discussed Draw Schedules in previous posts, but here is the lending perspective: Your budget must match the lender's release schedule.
If your budget requires $20,000 upfront for materials, but your lender only releases funds in arrears (after work is done), you have a cash flow gap.
The Insider Tip: Before you sign the loan docs, show your lender your contractor’s payment schedule. Ask them, "Does this align with your draw process?" solving this cash flow mismatch before closing day shows a level of foresight that most flippers lack.
5. The "Worst Case" Exit Strategy
Finally, a lender looks at your budget to see if the deal still works if everything goes wrong.
If you go 10% over budget and the market drops 5%, can you still pay the lender back? If the answer is "No," the deal is too thin.
Lenders want to see that even in a "break-even" scenario for you, they still get their principal and interest. If your budget is so tight that a single mistake puts the lender's capital at risk, they will pass.
Summary
Private money is a relationship business. The money is easy to find; trust is hard to earn.
By presenting a budget that prioritizes detail, includes safety nets (contingencies), and validates your contractor, you stop asking for a loan and start offering a secured investment opportunity. That is the shift that allows you to scale from one flip a year to ten.
About the Author
Bob Schmalz is a licensed Real Estate Broker in Los Angeles, Ca. Specializing in investment properties and distressed assets. Unlike traditional agents who focus solely on aesthetics, Bob understands the critical math behind flipping—from ARV analysis to renovation ROI.
With a deep network of private lenders and vetted contractors, Bob helps clients not only find the deal but structure it for maximum profitability.
Bob Schmalz
Call / Text / WhatsApp: 310.505.5571
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