Dutch Interest vs. Interest on Drawn Funds: How Hard Money Rehab Draws Change Your Holding Costs and Your MAO

How Rehab Draws Actually Work (and Why the Interest Method Matters)

A hard money rehab loan usually comes in two pieces: the purchase funds you receive at closing and a rehab holdback the lender keeps in reserve. You don't get the holdback upfront. Instead, you pay your contractor (or front the money yourself), finish a phase of work, and request a draw. The lender sends an inspector to confirm the work is complete, then reimburses you for that phase.

Each draw has a cost beyond the money itself. Most lenders charge a draw or inspection fee, often somewhere around $150 to $300 per request, and turnaround can take several business days. That means you need bridge cash to keep the job moving between reimbursements. Fewer, larger draws save on fees but tie up more of your own money for longer.

The interest method decides what you pay on the holdback the lender hasn't released yet. With Dutch interest, the lender charges interest on the full loan amount from day one, including rehab money still sitting in their account. With non-Dutch interest (interest on drawn funds), you pay only on what has actually been disbursed. Say you borrow $300,000 at 12% with $60,000 held back for rehab. Under Dutch interest, month one costs $3,000. Under non-Dutch interest, you pay on $240,000, or $2,400, and the bill rises only as draws go out.

That gap flows straight into your holding costs, alongside taxes, insurance, and utilities. Holding costs are one line in the full MAO formula: ARV minus rehab, minus buying costs, minus holding costs, minus selling costs, minus your target profit. Every extra dollar of interest has to come off your offer, or it comes out of your profit.

The quick 70% rule hides this. The formula (ARV x 0.70) minus repairs lumps every non-rehab cost into a 30% cushion and assumes that cushion is big enough. On a long rehab with a large holdback and Dutch interest, it may not be. Ask the lender which method they use before you set your offer, not after you've signed the term sheet.

Worked Example: Same Loan, Same Rate, $1,500 Difference in Interest

Take a flip with a $320,000 ARV, bought at $190,000 with a $60,000 rehab budget. The lender funds 90% of the purchase ($171,000) plus 100% of the rehab, released in four $15,000 draws at months 1, 2, 3, and 4. The rate is 12% annually (1% per month), and you plan a 6-month hold. The two term sheets are identical except for how interest is calculated.

With Dutch interest, you pay on the full $231,000 commitment from day one, even though $60,000 of it sits in the lender's account for months. The math is $231,000 x 1% x 6 = $13,860. You pay interest on rehab money you can't touch yet.

With interest on drawn funds, the $171,000 purchase portion accrues for all six months: $171,000 x 1% x 6 = $10,260. Each $15,000 draw costs $150 per month, but only after it's released. The month 1 draw accrues for 5 months, month 2 for 4, month 3 for 3, and month 4 for 2. That's $150 x (5 + 4 + 3 + 2) = $2,100, for a total of $12,360.

The gap is $13,860 minus $12,360, or $1,500. Same lender rate, same loan size, same project, and one structure costs $1,500 more. Nothing about the property changed, only the fine print.

Now run it through your offer math, holding your target profit constant. Assume 6% selling costs ($19,200), $5,000 in closing costs, $3,000 in taxes, insurance, and utilities, and a $25,000 profit target. MAO = $320,000 - $60,000 - $19,200 - $5,000 - $3,000 - $25,000 - interest. With Dutch interest, that's $207,800 - $13,860 = $193,940. With interest on drawn funds, it's $207,800 - $12,360 = $195,440. The $1,500 in saved interest raises your MAO by exactly $1,500, dollar for dollar. On a competitive deal, that can be the difference between winning the contract and losing it to another bidder.

Worked Example: Draw Delays, Bridge Cash, and a Timeline Slip

Stay with the same deal: a $231,000 hard money loan at 12% (1% per month), with $60,000 of rehab released in four $15,000 draws. Non-Dutch interest saved $1,500 on paper. But draws reimburse work that is already done, so your contractor gets paid from your pocket first. In practice you float roughly one full $15,000 draw at a time.

The float lasts longer than most new investors expect. After you request a draw, the lender schedules an inspector, reviews photos, and wires funds, which commonly takes 7 to 10 days. During that window your crew is already starting the next phase, so plan on keeping $15,000 to $20,000 of bridge cash liquid for the entire rehab. That cash is not lost, but it is tied up and cannot fund your next deal.

Draw fees eat into the savings too. At $150 per inspection, four draws cost $600. Here is the real comparison:

• Interest saved with non-Dutch: $1,500
• Draw fees: $4 x $150 = $600
• Net benefit: $1,500 - $600 = $900

Now add a 2-month slip after rehab is fully drawn, perhaps a delayed final inspection or a slow sale. At that point the entire $231,000 is outstanding under either method, so the extra interest is identical: $231,000 x 1% x 2 = $4,620. The interest method only saves money while funds sit undrawn during the rehab window. Once the last draw goes out, Dutch and non-Dutch loans cost exactly the same per month.

Say the deal penciled at $36,000 profit on a $190,000 purchase, with the $600 in fees already included. The slip drops profit to $36,000 - $4,620 = $31,380. If your target profit is $30,000, your maximum offer was $196,000 before and is now $191,380, a $4,620 drop. One two-month delay wipes out the $900 net benefit about five times over. Every dollar of holding cost comes straight off your MAO, so build timeline cushion into the offer before you negotiate rate structure.

Nuances: When the Interest Method Matters More or Barely at All

The gap between Dutch interest and interest on drawn funds grows with the size of the holdback. On a rehab-heavy deal, say a $300,000 loan where $150,000 sits in the construction holdback, half the loan can be costing you interest before a single contractor shows up. On a light cosmetic flip with a $180,000 loan and a $15,000 holdback, the difference shrinks fast. If about $7,500 of that holdback sits undrawn on average over a 4-month project at 10%, the Dutch premium is roughly $250 ($7,500 x 0.10 / 12 x 4).

Your draw schedule shifts the math too. Front-loaded projects, like a full gut where demo, framing, and mechanicals happen in the first six weeks, pull the money out early and narrow the gap. Watch for lenders who require you to fund the first draw yourself and get reimbursed later. That ties up your own cash, and on a Dutch loan you are paying interest on money you have effectively advanced to the project.

Minimum interest periods can erase any savings from a fast flip. If the loan carries a 3-month minimum and you sell in 10 weeks, you pay for 3 months regardless of method. Extension fees work the other way: a 1-point fee to extend 3 months on a $300,000 loan adds $3,000, and Dutch interest keeps charging on the full balance the whole time.

When you get competing quotes, run both through your actual draw timing instead of comparing rates. Take a $250,000 loan with a $100,000 holdback over 6 months. Lender A charges 10% Dutch: $250,000 x 0.10 / 12 x 6 = $12,500. Lender B charges 11% on drawn funds, and your draw schedule puts the average outstanding balance at $210,000: $210,000 x 0.11 / 12 x 6 = $11,550. The higher rate is $950 cheaper.

Flip the inputs and the answer can change. A front-loaded schedule pushes that average balance closer to $250,000, and Lender A wins. Build a simple month-by-month balance table before you sign, then plug the true interest figure into your holding costs so your MAO reflects the loan you will actually pay for.

Common Mistakes That Quietly Inflate Your Holding Costs

Assuming every loan charges interest only on drawn funds. Plenty of investors hear "you only pay on what you draw" from one lender and assume it applies to every lender. It doesn't. On a $200,000 loan with a $60,000 rehab holdback at 12%, Dutch interest costs $2,000 a month from day one, while non-Dutch interest starts at $1,400. Find the interest calculation line on the term sheet and get the answer in writing before you run numbers.

Modeling interest on the purchase loan only. Even with a non-Dutch loan, the holdback becomes interest-bearing debt as you draw it. By month four, most of that $60,000 is usually out, so you are paying close to the full $2,000 a month. A spreadsheet that holds $1,400 flat for six months can understate interest by as much as $3,600.

Ignoring draw fees and inspection lag. Many lenders charge a fee for each draw inspection. At $250 per draw, four draws add $1,000 that rarely shows up in a first-pass budget. Funds also commonly arrive several business days after the inspection. While you wait, you either float the contractor with your own cash or crews stop working, and both cost you.

Front-loading the contractor's payment schedule. Contractors often ask for a 30% deposit, but lenders typically reimburse completed work only. On a $60,000 scope, that $18,000 deposit comes out of your pocket until the first draw clears. Negotiate payment milestones that line up with the lender's draw schedule, such as demo complete, rough-ins passed, drywall hung, and finishes installed.

Plugging a generic holding cost into your MAO. A flat "$1,500 a month" guess hides every mistake above. Build holding costs from a month-by-month drawn balance, the actual interest method, draw fees, and realistic lag, then subtract that total when you calculate MAO. FlipSmrt's line-item rehab costs by trade give you a starting point for sequencing those draws before you call lenders, so you can compare every quote against the same schedule.

FAQ: Hard Money Draws and Interest

How do I find out if a loan uses Dutch interest? Ask the lender directly: "Is interest charged on the full loan amount from closing, or only on funds already disbursed?" Then confirm it in the term sheet and promissory note. Look for language like "interest accrues on the total loan commitment" (Dutch) versus "interest accrues on the outstanding principal balance" (drawn funds). If the wording is vague, request a sample payoff statement for a loan with an undrawn rehab holdback, because a verbal answer from a loan officer means nothing until it is in writing.

Can I negotiate non-Dutch terms? Often, yes, especially once you have a few completed flips with that lender. Some lenders will drop Dutch interest in exchange for an extra half point or a slightly higher rate. Run both versions before choosing. Half a point on a $250,000 loan is $1,250 up front, which can cost more than Dutch interest would on a short, fast rehab.

How many draws should I plan for? A rehab in the $40,000 to $80,000 range typically runs 3 to 5 draws, tied to milestones like demo and rough-ins, drywall, and finishes. Each draw usually carries an inspection fee of $150 to $300, plus several days to a week before funds arrive. Budget those fees as their own line item and assume you will front each phase with your own cash. Fewer, larger draws mean fewer fees but more bridge cash tied up.

Does the interest method affect the 70% rule? No, and that is exactly the problem. On a $300,000 ARV with $60,000 in repairs, the shortcut gives ($300,000 x 0.70) - $60,000 = $150,000 no matter how interest is charged. The full MAO formula subtracts buying, holding, and selling costs plus your target profit, so an extra $1,800 in Dutch interest becomes $1,800 less you can offer. Use the 70% rule to screen, never to set your final number.

How fast can I see whether a deal still pencils once financing changes? FlipSmrt returns an ARV from adjusted sold comps, line-item rehab by trade priced for the county, an MAO that accounts for holding and selling costs and your profit target, and ROI in under 5 minutes. Adjust your holding costs for Dutch versus drawn-funds interest and check whether the go or no-go verdict changes. The first 3 analyses are free, so you can test this on a live deal before committing to a term sheet.