Real estate investors often need to move quickly when opportunity knocks. That’s where hard money loans come in. If you’ve heard the term but aren’t quite sure what it means—or whether it’s right for you—this post will walk you through the basics, with real-world context and a closer look at the pros and cons.
What Is Hard Money?
Hard money is a short-term loan secured by real estate. These loans are issued by private lenders or investor groups rather than traditional banks. What makes them unique is that approval is based more on the value of the property (the asset) than on the borrower’s creditworthiness.
If you find a great investment property but don’t have time to wait for traditional financing—or if your financial history doesn’t meet bank requirements—a hard money loan can provide a quick path to funding.
When Is Hard Money Used?
Hard money loans are common in:
- Fix-and-flip projects: Investors use hard money to buy, renovate, and sell properties quickly.
- Bridge financing: They serve as a stopgap until long-term financing is secured.
- Auction or distressed sales: Investors use hard money for speed and flexibility.
Example in Action
Say you find a distressed property listed at $150,000. After $30,000 in repairs, you expect to sell it for $250,000. A hard money lender agrees to lend you $130,000—based on 65% of the after-repair value (ARV). With your own capital covering the balance and renovations, you flip the house in six months and make a solid return.
Pros of Hard Money (Explained)
1. Speed
Hard money loans can close in a matter of days, while traditional loans often take weeks or months. This speed gives investors an edge in competitive markets.
2. Flexible Criteria
Because lenders focus on the property’s value, they may overlook issues like poor credit, recent bankruptcies, or limited income documentation.
3. Ideal for Non-Traditional Deals
If you’re investing in properties that banks consider too risky—like fix-and-flips or vacant homes—hard money may be one of the few available options.
4. Leverage for Big Opportunities
You can use hard money to leverage your capital, enabling you to take on more deals or larger projects than you could with cash alone.
Cons of Hard Money (Explained)
1. Higher Interest Rates
Rates typically range from 10% to 15%, plus points (1–3% of the loan amount paid upfront). This can eat into your profit margin if you’re not careful with budgeting.
2. Short Repayment Terms
Most loans are due in 6 to 18 months. If your project takes longer than expected, refinancing or selling quickly becomes critical.
3. Lower Loan-to-Value (LTV)
Hard money lenders typically loan 60–75% of the property’s value (or ARV). This means you’ll need more of your own cash in the deal.
4. Greater Risk if the Deal Goes Sideways
If the project runs into issues—like cost overruns or a slow sale—you’re still on the hook for repaying the loan, often with steep penalties if you default.
Is Hard Money Right for You?
Hard money is a powerful tool for investors who understand the risks and can execute quickly. It’s not cheap—but when used strategically, it can unlock deals that would otherwise be out of reach.