How hard money works
Hard money lenders underwrite the property, not the borrower. The collateral’s value — specifically its post-rehab After Repair Value (ARV) — drives the loan amount. Income verification, DTI ratios, and credit score matter less or not at all. In exchange for speed and flexibility, the borrower pays a premium.
The typical underwrite: streamlined or desktop appraisal (sometimes no full appraisal — just a Broker Price Opinion), exit strategy review (what’s the refi or sale path?), investor experience check (prior successful deals reduce friction), and a quick title search. Closing in 7–14 days is standard; some lenders pre-approve borrowers and fund in 3 days.
Typical terms
- Interest rate — 9–15% annual, typically interest-only. Rate compensates for short term and asset-based underwriting.
- Origination points — 2–5 points upfront, where one point = 1% of loan amount. A $200,000 loan at 3 points = $6,000 paid at closing.
- Term — 6–18 months, with extensions typically available at 0.5–1% of principal per month.
- LTC — loan-to-cost: 70–85% of total project cost (purchase + rehab). Typical floor is 80%.
- ARV-LTV — loan-to-ARV: 65–75% of projected post-rehab value. Lender caps the loan at the lesser of LTC and ARV-LTV.
- Prepayment penalty — often 3–6 month minimum interest, or 1–3% of principal if paid off in the first 3–6 months.
- Default rate — 18–24% interest triggered on default. Brutal for a struggling flipper.
Worked example. $200,000 purchase + $50,000 rehab = $250,000 project cost. Projected ARV: $350,000. Loan at 85% LTC = $212,500. ARV check: $212,500 / $350,000 = 60.7% ARV-LTV, which is under the 70% cap. Loan approved at $212,500. Investor brings $37,500 cash plus closing costs. Rate 11%, 3 points, 12 months.
Hard money vs. conventional
| Feature | Hard money | Conventional |
|---|---|---|
| Underwriting | Asset value, ARV | Credit, DTI, income |
| Close time | 7–14 days | 30–60 days |
| Rate | 9–15% | 5–8% |
| Points | 2–5 | 0–2 |
| Term | 6–18 months | 15–30 years |
| Distressed-property eligible | Yes | No |
Lender types
- Individual private lenders — wealthy individuals, retirees, family offices deploying personal capital for yield. Flexible, relationship- driven. Smaller loan sizes ($100K–$500K). Rates often negotiable based on relationship tenure.
- Mortgage funds and pools — syndicated pools of investor capital lending as a business. More process, consistent availability, can handle larger deals ($500K+).
- National fix-and-flip specialists — institutional lenders like Kiavi, Lima One Capital, RCN Capital, Constructive Loans, Anchor Loans. Tech- driven platforms, nationwide coverage, AVM-based valuation, 5–10 day closes common. Best for experienced operators doing multiple deals.
- Regional hard money lenders — city or state-specific lenders who know the local market intimately. Often the best fit for investors working in a single metro.
Draw schedules
Hard money for rehab projects typically funds the purchase at closing and holds rehab capital in escrow, releasing it on milestone-based draws:
- Closing draw — 100% of purchase price plus closing costs funded at close.
- Rehab draws — typically 3–5 draws tied to completion milestones (demo, rough-in, drywall, finishes, punch list). Draw size is usually 20–30% of rehab budget per milestone.
- Inspection — third-party inspector verifies completion before each draw is released. Inspection fee $300–500 per visit, paid by borrower.
- Holdback — 10–20% of total rehab held until final walkthrough and certificate of occupancy / final inspection.
Draw mechanics affect cash flow. Investors must typically pay contractors before the draw funds, so working capital reserves of 20–30% of rehab budget are required regardless of LTC. Running out of interim cash is a common reason well-planned rehabs stall mid-project.
When hard money makes sense
- Auction purchases — the clearing price at auction requires cash within days; conventional financing can’t move that fast. Hard money is the standard tool.
- Distressed properties — bank financing fails on properties that don’t meet habitability standards. Hard money lends into rehab potential.
- Fast-turn flips — 3–6 month hold cycles where the high rate is offset by a large ARV delta.
- Bridge to DSCR / BRRRR — acquire and rehab with hard money, then refinance to long-term DSCR once stabilized.
- Credit-challenged investors — hard money’s underwriting works where conventional underwriting fails.
When it doesn’t
- Long-term holds — 12% interest on a 10-year rental destroys cash flow that 6.5% conventional financing preserves.
- Thin margins — deals with less than 15% projected profit can’t absorb 3 points plus 12% interest for 6 months. Do the math; hard money kills marginal deals.
- Inexperienced operators — many hard money lenders require 3+ prior successful projects. First-timers face rejection or punitive pricing. Fix with a mentor co-signing or by using private money first.
- Unstable markets — projected ARV is the whole loan thesis. A 10% ARV decline can leave the loan underwater at payoff time, triggering extension fees or default.
How to find and vet lenders
- Local REIA meetings and real estate meetups (active lenders attend looking for deal flow)
- Online marketplaces: Kiavi.com, Loansnap, Bigger Pockets hard money lender directory
- Referrals from title companies, closing attorneys, and experienced local flippers
- Real estate agent relationships with investor-focused lenders
Vetting checklist:
- NMLS ID and license status (check nmlsconsumeraccess.org)
- Better Business Bureau reviews and complaints
- Ask for 3 borrower references — call them
- Verify lending sources (own fund, syndicated pool, individual)
- Rate-quote range for your specific deal profile
- Extension policy and fees
- Default rate terms
- How they handle draw disputes
Escape strategies
Every hard money loan needs an exit plan at origination. Four common exits:
- Refinance to DSCR — standard BRRRR exit. Stabilize rental, hit seasoning, refinance at 75% LTV of stabilized value.
- Sale to retail — list and sell post-rehab. Hard money paid off at closing. Classic flip exit.
- Refinance to conventional — if the investor can qualify, a 30-year conventional or investor loan replaces the hard money.
- Sale to another investor — assignment or double close to wholesaler, rental portfolio buyer, or another flipper.
Common pitfalls
- Exit loan fails. The DSCR refinance appraisal comes in $40K low. Investor can’t refi the full hard money balance out. Now they’re scrambling at maturity. Mitigate: budget conservatively; have a second lender relationship.
- Rehab overrun pushes past maturity. Contractor delays, permit issues, supply chain gaps. Extension fees of 1% per month eat profit fast. Mitigate: build a 2–3 month buffer into the rehab timeline.
- Prepayment penalty trap. Investor wants to refi at month 4 into a cheaper product, but a 6-month minimum interest provision means paying 2 months of interest for nothing. Negotiate this out at loan origination.
- ARV overstated. Lender accepts borrower’s comps and ARV is inflated by 10%. At sale, the property clears $40K under. Investor is underwater. Mitigate: use honest ARV analysis, stress-test at 90% of projected.
- Default rate surprise. 18–24% default rate plus compounding legal and servicing fees can create 30%+ effective annual cost on an unresolvable default. Always resolve before the default trigger.
- Hidden fees. Application fees, underwriting fees, document preparation, inspection cycles, extension fees, wire fees. Get the full fee schedule in writing before signing.
- Personal guarantee scope. Most hard money requires a personal guarantee. Negotiate for “bad boy” carve-out guarantees only (fraud, unauthorized sale) rather than full recourse.