Hard Money

What it is

Hard money is short-term asset-based lending for flips. The lender underwrites the deal, not the borrower. They’re looking at the after-repair value. If the house is going to be worth $420K when you’re done, and you’re getting it at $264K with a $30K renovation, they’ll give you around 70% of the ARV — $294K — regardless of what your W-2 says or what your credit score is.

Typical terms: 10 to 12% interest, 2 to 4 points up front, 70% of ARV, 6 to 18 month terms. Points are just percentage points of the loan — 3 points on a $200K loan is $6,000 at closing. The lender releases renovation funds in draws against inspected work. Exit is either a sale at the end of the flip or a refinance into a long-term product.

The first time I heard “hard money,” I thought it was like a mafia thing. A loan shark kind of thing. No. They just call conventional mortgages soft money and this kind of thing hard money because the terms are harder. Higher interest, more restrictions, shorter fuse.

Why it matters

Hard money is the tool that lets you close on houses that conventional lenders won’t touch. A bombed out house with no working kitchen, no HVAC, and boarded windows cannot close with a conventional mortgage. The appraiser won’t sign off and the bank won’t lend. Hard money doesn’t care because they’re betting on the ARV, not the current condition.

Here’s the cost reality: if you buy a house at $200K acquisition and $30K renovation, hard money at 12% plus 3 points means you’re paying maybe $6,000 up front and $1,500–$2,000 per month in interest. Over six months that’s around $13,500 in interest costs alone. Add that to closing costs on both ends and taxes and you can see how a “100K profit” deal gets walked back to $63K pretty quickly.

That’s not a reason to avoid hard money. It’s a reason to make sure you have real equity in the deal before you take it. You don’t do hard money deals that are barely profitable at six months. You do deals that can absorb a twelve-month drag and still clear the minimum.

Hard money punishes slow execution. A conventional loan at 7% where you’re dragging out to twelve months is expensive too, but not nearly as bad. Hard money doubles down on time.

How it shows up

Most hard money lenders won’t give 100% of the deal to a first-timer. They want to see five or more deals under your belt before they’ll lend all the way. For beginners, they’ll typically do 90% of the purchase price and 100% of the renovation funds, controlled in draws. You bring the 10% down plus the points at closing.

There are two types of hard money lenders worth knowing. Institutional hard money — corporate shops that run it like a business. And private hard money — guys like me who have done enough deals that they’d rather lend at 12% than let money sit. Private lenders are more negotiable. If you walk them a deal where the ARV is $420K and you’ve got it under contract at $220K with a $30K reno, they know what they’re looking at. That’s the kind of deal that loosens terms.

Finding lenders: start local. Regional hard money shops know your market, know your comps, and will pick up the phone. National shops are bigger but more bureaucratic. Keep two local relationships warm at all times so you’re not at the mercy of one lender’s mood when you need to close fast.

Related

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