Putting together a draw schedule can be daunting, especially since a well-formulated draw schedule is one of the earliest and most important components of a profitable flip. These five tips on how to build a draw schedule and construction draw schedule examples from the experts at Asset Based Lending will help you build the ultimate draw schedule for your next real estate investment project.
What is a construction draw schedule?
A draw schedule is an outline of all of the work you need to do on your fix and flip or new construction project. Based on the scope of work for your investment project, you sort the work into stages and calculate how much each stage of your project will cost. As you complete each stage of your project, you request reimbursement from your hard money lender based on the agreed-upon construction draw schedule and get the cash you need to continue with your investment.
1. Less is More
When you request a draw, the lender will send an inspector to check that all the work listed in the completed stage is finished. For you, that probably means each draw request shaves a few bucks off your total profits and tacks a few days onto your timeline – neither of which are ideal.
[su_divider top=”no” divider_color=”#e4e4e4″ size=”1″ margin=”10″]Pro Tip: Besides only working with hard money lenders that are exceptional at the draw process, you can save time throughout the deal by scheduling draws in advance. For example, if you know that draw 1 will be complete 3 days from now, call the lender and request the inspection for that day rather than waiting until 3 days from now to inform the lender that the phase is complete.[su_divider top=”no” divider_color=”#e4e4e4″ size=”1″ margin=”10″]
The fewer draws you need, the better off you will be. Of course, in most cases, it is unrealistic to aim for one or two draws – four to six is a better goal for most rehab budgets. Keep in mind: draws are funded in arrears. This means that you need to have the cash to fund the first draw upfront since you will get reimbursed at the end of each stage of your project. If you plan for too few draws, or draws for too large of an amount, you risk running out of cash midway through your project. Minimizing your draws is a good thing, but be realistic about what how much of your own capital you can put into construction at one time.
2. Flush Out the Details
With little upgrades like lighting fixtures or door knob replacements, it may be tempting to make a guess about the costs and move on to estimating more significant costs. However, an extra $50 here and there will add up, and you don’t want something as simple as a toilet seat cover to be the reason your project stalls.
The more thought you put into your budget beforehand, the more precise your draw schedule will be and the less likely you are to need to renegotiate scope of work later on. Plus, having a thorough plan for your project will make things run smoother and give you a better handle on your investment.
3. Keep it Simple
While you should be aware of every detail of your plan, that doesn’t mean your hard money lender needs to know absolutely everything. There’s no need to list the appliance brands or the quality rating of the fertilizer you plan on using to revitalize the yard in your draw schedule. Keeping the schedule simple also gives you some wiggle room in which stage you need to complete certain cosmetic fixes in case you run into setbacks or shipment delays.
Your lender will send an inspector to check that all the work you said you would finish in each stage is completed before disbursing funds, so don’t make the construction draw process harder on yourself – or your hard money lender – by putting every minutiae into your draw schedule.
4. Itemize Your Draws
Although an ideal project would go exactly according to plan, with each stage costing precisely what you estimated, the real world is hardly perfect. It is possible that some improvements will be more difficult or costly than you anticipated and itemizing your draws will go a long way toward making it through those challenges. For example:
Suboptimal Draw Layout:
Draw 1: $20,000
(Framing, HVAC roughed, electric repairs, plumbing repairs, bathrooms tiled)
Improved Draw Layout:
Draw 1: $20,000
- Framing: $5,000
- HVAC: $5,000
- Electric: $2,500
- Plumbing: $2,500
- Bathrooms: $5,000
This way, it will be easier for your hard money lender to work with you and shift funding around in case of setbacks. For example, if all of draw 1 is complete except the Electric, an itemized draw schedule allows the lender to fund part of the draw, making sure your project – and budget – don’t get held up.
[su_divider top=”no” divider_color=”#e4e4e4″ size=”1″ margin=”10″]Pro tip: Set up your draw schedule in Excel, it will much simpler to work with if you need to shift numbers and order around.[su_divider top=”no” divider_color=”#e4e4e4″ size=”1″ margin=”10″]
5. Be Consistent
Because your draws are funded in arrears, you pay for each stage of the project and are reimbursed after the stage is completed. If you play your cards right, though, you may only need to put up a significant chunk of your own capital at the very first stage of your project.
Try and group your improvements in such a way that each stage incurs roughly the same cost. For example, rather than having four draws in amounts of $20,000, $5,000, $35,000, and $15,000, it would be better to keep the draws as similar in value as possible. This does not mean, of course, that each draw needs to be identical, just that they should be in the same ballpark. With the previous example, shifting the work so that the total draw amounts are $20,000, $18,000, $22,000, and $15,000 would reduce the fluctuation in how much of your own capital is invested in the project at one time.
Trying to keep the values consistent will also prevent you from taking unnecessary draws. If you can squeeze that $2,000 painting and landscaping draw in with the driveway paving and trim, your project will be the better for it.[su_divider top=”no” divider_color=”#e4e4e4″ size=”1″ margin=”10″]
These tips and construction draw schedule examples will help you put together the ultimate draw schedule, but once you have it, you need to stick to it. Your lender will hold you accountable to the terms you agree to, and you need to fund the first draw yourself, so don’t take on more in one stage than you can handle. If you are considering taking on a real estate investment project and want to talk about funding, call your local hard money lender – Asset Based Lending – today.