What Hard Money Really Is (and Isn’t)
Hard money is the sprinter of real estate financing—short-term, asset-based loans secured by the property itself rather than your W-2s and tax returns. Lenders care most about the collateral and your plan to turn it around, which is why investors use hard money for fix-and-flips, competitive auction buys, quick bridge loans, and properties that banks won’t touch.
Expect speed and flexibility, but at a price. Rates and fees are higher than conventional loans, terms are shorter, and underwriting cuts through the paperwork. While credit is less central, many lenders still peek at your history and experience to gauge risk. If you need to close fast on a deal with hair—title quirks, heavy rehab, tight timelines—hard money can be the difference between watching a great opportunity vanish and owning it.
Start with the Numbers
Before you fill out a single application, get intimate with your math. Start with the purchase price, then stack on all the real costs:
- Rehab budget: labor, materials, permits, inspections.
- Points and lender fees: origination, underwriting, doc prep.
- Closing costs: title, escrow, recording, insurance.
- Holding costs: interest-only payments, utilities, taxes, HOA, insurance.
- Contingency: 10–15% for surprises you’ll wish you didn’t have.
Build your deal around ARV. Use your profit target and project expenditures to reverse-engineer your maximum offer. Since many lenders cap LTV and LTC at 65–75% of ARV or a percentage of total cost, know your limits. Knowing your numbers lets you speak a lender’s language and negotiate like a pro.
Build Your Deal Profile
Lenders love clarity. Sketch a tight profile of the project:
- Property type and condition: single-family, small multifamily, teardown, cosmetic update.
- Location and comps: real, recent, relevant sales that support ARV.
- Scope of work: line-item budget with timelines and trades.
- Exit strategy: flip resale, refinance to rental, or bridge to longer-term debt.
- Team and track record: contractor, agents, property manager, plus your past deals if you have them.
The stronger your plan, the less friction you’ll face in underwriting and the more leverage you’ll have on terms.
Shop Lenders Like a Pro
Search local, regional, and national lenders. Trustworthy lenders with transparent terms, trustworthy funding, and clean closings are important. Ask other investors pointed questions and confirm they can deliver in your market and schedule. A lender’s website may appear nice, but their draw procedure and communication reveal who they are.
Shortlist three to five. Get written term sheets so you can compare apples to apples. Speed is great, but consistency wins deals.
Decode the Terms
Hard money terms are not one-size-fits-all. Read the fine print and understand the moving pieces:
- Interest rate: typically higher than bank loans; often interest-only.
- Points: origination fees (e.g., 1–4% of the loan) paid at closing.
- Term length: commonly 6–12 months; extensions may cost extra.
- Basis: is the loan based on ARV, purchase price, or total cost?
- LTV/LTC caps: how much of the deal they’ll fund.
- Rehab holdbacks and draws: money released in stages after inspections.
- Prepayment penalties: some lenders want a minimum interest period.
- Late fees and default rates: know the pain if you miss a payment.
- Personal guarantee and recourse: understand your liability.
- Fees: underwriting, doc prep, appraisal/BPO, inspection, extension.
Line these up side by side. A slightly higher rate with flexible draws and no prepay can beat a lower rate wrapped in heavy fees.
Prepare a Clean Package
A tight loan package signals you’re ready to execute. Include:
- Purchase contract and any addenda.
- Detailed scope of work, budget, and timeline.
- Comps supporting ARV with notes on adjustments.
- Rehab experience or a brief “deal resume.”
- Entity docs (LLC/Corp) and operating agreement, if relevant.
- Proof of down payment and reserves.
- Insurance binder (or plan to bind at closing).
- Title/escrow contact and target closing date.
Be responsive. If the lender orders a valuation or inspection, coordinate quickly. The smoother you run, the faster funds land.
Close Fast and Manage the Loan
Once cleared to close, timeline is everything. Confirm the closing date with title, wire instructions, and draw schedule. At funding, rehab dollars may sit in a holdback account and release upon milestones—demo complete, rough-in approved, finishes installed.
Track cash flow religiously. Submit draw requests with photos, invoices, and permits. Keep a contingency reserve and communicate early if schedules slip. Hit your exit—sale or refinance—before the term end, and if you need extra time, arrange an extension before you’re in the penalty zone.
Common Pitfalls to Avoid
- Underestimating rehab: the cheapest bid isn’t always the least expensive outcome.
- Ignoring holding costs: interest-only adds up; budget for tax, insurance, and utilities.
- Weak comps: rosy ARV claims fall apart when appraisers look at reality.
- Overleveraging: max LTV plus thin margins is how investors lose sleep (and deals).
- Vague scopes: lenders release draws on specifics; “miscellaneous” won’t cut it.
- Slow permitting: schedules slip when the city says no; plan for approvals.
- Choosing on rate alone: you’re buying execution—funding certainty beats a shiny term sheet that stalls.
When Hard Money Makes Sense (and When It Doesn’t)
It highlights troubled assets, quick-turn flips, competitive markets, and time-sensitive bridge situations. Unless you refinance into steady, lower-cost debt, it’s not ideal for long-term buy-and-hold. Banks offer affordable conventional loans on clean properties without hurry. Hard money pays off on high-risk projects.
FAQ
Is hard money only for flippers?
No—flippers are common users, but it’s also used for bridge loans, ground-up construction, auction purchases, and quick closes on properties banks won’t fund.
How fast can I close with a hard money lender?
With a complete package, closings often happen in 3–10 days, and some lenders can fund in 24–72 hours for straightforward deals.
What down payment should I expect?
Plan for 10–30% down plus closing costs and reserves, depending on your experience, the property, and lender guidelines.
Do hard money lenders check credit?
Most are asset-based but still run at least a soft credit pull and review your background to assess risk and reliability.
What kind of interest rates are typical?
Rates vary by market and deal complexity, commonly in the high single digits to the teens, plus points and fees at closing.
Can I use hard money to buy rentals?
Yes—many investors acquire and renovate with hard money, then refinance into long-term rental financing once the property stabilizes.
How are rehab funds released?
Lenders usually hold back construction funds and release them in draws after inspections and proof of completed work.
What happens if my project runs over schedule?
You can request extensions for a fee, but it’s better to communicate early, adjust timelines, and keep contingency funds to avoid default.
Are points and fees negotiable?
Often, especially if you bring repeat business, solid deals, or are willing to accept other terms like lower leverage.
What’s the biggest rookie mistake with hard money?
Underwriting the deal on best-case assumptions—build in contingency, validate comps, and protect your margin before you ever close.
