Hard Money Loan

What Is a Hard Money Loan?

A hard money loan is a short-term, asset-based loan secured by real property. Unlike conventional mortgages that focus on borrower income and creditworthiness, hard money lenders primarily evaluate the property itself, specifically its current value and after-repair value. Hard money loans are funded by private investors or lending companies and are designed for speed, typically closing in 7 to 14 days compared to 30 to 45 days for conventional loans.

When to Use Hard Money

Hard money loans are the tool of choice for fix-and-flip projects, the BRRRR strategy, and bridge financing situations where speed matters. If you find a distressed property at auction that needs to close in 10 days, hard money is likely your only option. If you are executing a BRRRR and need acquisition plus rehab funding before refinancing into permanent financing, hard money fills that gap. The common thread is short-term deals where the exit strategy is clearly defined.

Typical Rates, Points, and Terms

Hard money loans typically carry interest rates between 10% and 14%, with origination fees of 2 to 4 points. Loan terms range from 6 to 24 months. Most lenders will fund 65% to 75% of the after-repair value, which often covers the purchase price and a portion of renovation costs. Some lenders also escrow rehab funds and release them in draws as work is completed. Monthly payments are usually interest-only, keeping carrying costs manageable during the renovation period.

The Exit Strategy Is Everything

Every hard money lender will ask about your exit strategy, and you need a clear answer. For flips, the exit is selling the renovated property. For BRRRR, the exit is refinancing into a long-term loan. For bridge situations, the exit is selling another asset or securing permanent financing. Hard money loans that go past their term trigger extensions, penalties, and higher rates. Investors who fail to plan their exit strategy get crushed by carrying costs.

Evaluating Hard Money Lenders

Not all hard money lenders are created equal. Compare total cost of capital, not just the interest rate. A lender charging 11% with 2 points and a 12-month term may be cheaper than one charging 10% with 4 points and a 6-month term if your project timeline is uncertain. Ask about extension policies, draw processes, and prepayment penalties. Check references from other investors. The best hard money lenders are partners who want to fund your next deal, not adversaries looking for a default.

Hard Money vs. Other Financing Options

Hard money is more expensive than conventional or DSCR financing, but it serves a different purpose. Compare it to private money lending, which may offer similar flexibility at potentially lower rates but requires personal relationships to source. Compare it to bridge loans from banks, which are cheaper but slower and harder to qualify for. Hard money wins on speed, flexibility, and availability. Use it strategically for short-term projects where the profit margin is large enough to absorb the higher cost of capital, and always have your long-term financing lined up before the hard money term expires.