Funding Your Deals: Conventional, Commercial, Hard Money, and Private Equity

TLDR

The money question is the #1 mental block for new investors. Here’s every funding option for house flips, how they work, and why hard money is usually the best starting point for anything other than your primary residence.

The Mental Block

Most people I teach agree with the philosophy and follow the logic of the business. Then they hit one question and freeze: where do I get the money?

That freeze is the most common reason people never do their first deal. Not bad deals. Not construction problems. The mental block around funding.

So let’s kill it. Here are every real funding option for real estate flips, how they actually work, and which ones make sense when.

Quick note: we’re not talking about your primary residence here yet. The primary residence uses a conventional mortgage because you’re buying it as your home. For investment properties, the math is different. We’ll cover both.

Conventional Mortgage

Conventional mortgages are for your primary residence. Not for investment properties.

On your primary residence, you can put 3.5% to 5% down. On a $200,000 house, that’s $7,000 to $10,000. You get to live in it while you renovate it. You can’t sell it for at least a year. And you get the most favorable rates and terms available.

That’s the primary residence play, and it’s the first step in The Steps section.

For investment properties, a conventional bank will give you 80% of the purchase price. Same $200,000 house: you bring $40,000 down plus your renovation costs out of pocket. If it’s a $30,000 cosmetic renovation, you’re in at $70,000 minimum. Most people don’t have that sitting around.

Conventional lending is safer and cheaper, but the capital requirement for investment flips is steep. Good if you have the cash. Not accessible for most people starting out.

Commercial Bank Loans

Commercial banks lend differently than conventional lenders.

Still around 20% down, but here’s the key difference: commercial banks will typically finance 80% of the acquisition plus the renovation costs combined, not just the acquisition.

Same $200,000 house, $30,000 renovation:

Total deal cost: $230,000
80% of that: $184,000
Your required down payment: $46,000

That’s better than the $70,000+ out of pocket with conventional, but still significant. And commercial loans tend to have higher rates and shorter terms than conventional mortgages.

It’s a legitimate option if you have some capital to work with and want cheaper money than hard money. The rates and structure are more favorable than hard money, but the capital requirement is still a barrier.

Hard Money

This is where most real estate investors start, and for good reason.

Hard money lenders don’t care what you paid for the house or what the renovation costs are. They care about one thing: the after-repair value (ARV). What will this house be worth when you’re done with it?

Here’s how the math works:

Same $200,000 house with $30,000 in renovations, but let’s say the ARV is $300,000. A hard money lender gives you 65-75% of ARV. At 70%, that’s $210,000.

You needed $230,000 total for the deal. They’re giving you $210,000. You bring $20,000.

Compare that to $70,000 with a conventional bank. Now you see why hard money is the starting point for most investors.

It gets better. Let’s say you found a deal where the ARV is $350,000. At 70%, that’s $245,000. You only needed $230,000. You just got $15,000 back at closing.

That’s how people flip with zero cash in the deal. The deal is what creates the funding capacity. The better the deal, the less cash you need.

Key Concept

Hard money rates are higher than bank rates, usually 10-14% annualized with origination fees on top. The math still works because you’re not holding the loan long-term. A hard money loan on a 4-month flip costs you roughly 4-5% of the loan amount in interest plus fees. That’s a cost of doing business, not a trap.

Where to find hard money lenders: Ask other investors in your market. REIA meetings. Local real estate Facebook groups. Many hard money lenders are former flippers who want to deploy capital. They’re not hard to find once you’re talking to other investors.

Private Money and Partnerships

Beyond banks and hard money lenders, there’s private money: friends, family, your rich uncle, or other investors who have capital and want returns.

Two structures:

Private debt. Your private lender acts like a hard money lender. You borrow their money at an agreed rate (let’s say 10-12%), they get paid monthly or at payoff, they don’t participate in the upside. Clean and simple.

Partnerships. You split the profit. You bring the deals, the construction management, and the execution. They bring the money. You agree to split the profit after costs, maybe 50/50.

Partnerships can be great, especially when you’re learning. If your partner is more experienced, you get mentorship built into the deal. The tradeoff is giving up half the upside.

My personal philosophy: I prefer hard money because I want the weight on my back. When I make a mistake, I want it to sting me and no one else. Hard money lenders are in the business of this. Private equity from friends and family puts someone else at risk from my learning curve. I’m not comfortable with that.

Common Mistake

Raising private equity before you know what you’re doing. I’ve seen this multiple times: someone does one flip, thinks they’ve figured it out, raises money from investors, and proceeds to make all the mistakes of a beginner with other people’s money on the line. Don’t do that. Get a few deals done first.

Why I Borrow Instead of Going All Cash

After that $200,000 loss, I went through a period where I tried to do everything in cash. Buy houses in cash. Do the work. Own it clean.

It worked, sort of. But I quickly ran into the problem: if one project stalls, I’m stuck. I’m sitting there waiting with no ability to start the next deal. The business locked up.

Borrowing lets you do more deals simultaneously. It lets your construction company (or your GC operation) get paid before the flip sells. It’s scalable in a way that all-cash isn’t.

And there’s a deeper reason: cash erodes to inflation. The cash sitting in your account is worth less next year than this year. Deployed into real estate, it’s working. It’s appreciating. It’s building equity. Cash is the oil in the machine, not the goal.

The goal is assets. Borrowing is how you get more of them while keeping your operating capital intact.

Keep enough cash to stay in business. Deploy the rest into deals. Borrow to bridge the gap.

FAQ

What credit score do I need for hard money?

Hard money lenders vary. Most want 620-680 minimum, lower than conventional. Some look primarily at the deal quality and your experience. A strong deal with a proven borrower can sometimes get funded with imperfect credit.

Should I tell my hard money lender I’m a first-time investor?

Yes. Don’t lie about your experience. Some hard money lenders specialize in newer investors and offer mentorship alongside capital. The ones that don’t want to work with beginners will tell you. That’s useful information too.

How do I find the right hard money lender for my market?

Go to a REIA meeting. Every market has them. Hard money lenders sponsor these events because they want to lend to active investors. You’ll meet several in one afternoon.

Is private equity ever a good idea?

Yes, in the right structure. If you’ve done several deals successfully and a sophisticated investor wants to fund your next one, that’s a legitimate arrangement. If you’ve done one deal and your cousin wants to put in his life savings, that’s a bad arrangement. The distinction is experience level and source of funds.

What’s the minimum cash I need to do my first investment flip?

With hard money on a deal where the numbers work, sometimes as little as $10,000-$20,000. On a bad deal, you could need $70,000+. The deal quality determines the cash requirement. Focus on finding a great deal first, then figure out funding.