Hard money is the most common way to fund a fix and flip deal. It’s tricky picking the one that will be the best for you—and no, it’s not just about interest rates.
My first real estate investment was an apartment building bought in my early twenties. I had no idea what I was doing and made many mistakes. Still, I knew instantly that I was hooked. As my business grew, I started looking for better financing options that catered to the things I needed for my investment properties that private loans and traditional mortgages just couldn’t do.
That’s when I began using hard money loans. Suddenly, I had a whole world of financing tailored to my real estate investor needs. However, I was a total newbie to all of this and didn’t know how to navigate this world without getting put through the wringer and ended up making some costly errors that took me a few years to bounce back from.
This guide is my way of preventing you from making those same mistakes. I want to show you the difference between the types of loans you can get for real estate investing and what a good hard money lender can offer you that others can’t. Plus, I’ll also give you a few ideas for how you can use hard money to successfully grow your business. Let’s get to it!
The Difference Between Hard Money and Traditional Loans
Hard money and traditional loans or mortgages are excellent tools to have in your investor’s toolkit, but you need to know the stark difference between the two. Otherwise, you could end up paying more using one when the other was a better fit for your situation.
When Should You Use a Mortgage?
- You need a lot of money – If you’re looking for a loan that covers the total purchase price of a home that’s $100k or more, a mortgage will be your best option.
- You don’t have a hard deadline – Mortgages can take a while to get funded due to the amount of paperwork they have. If you’re not on a short deadline and can wait a month or so, you’ll be fine using a mortgage.
- You need a long time to pay your loan back – Mortgages are underwritten to be paid off over 20-30 years, while hard money loans typically must be paid back in full within three years.
- You’re buying the property for your family – If you’re buying a property and intend to use it for your personal life, go for a mortgage. Hard money loans can get expensive for investors who don’t intend to quickly earn a profit from the sale of a home.
When Should You Use a Hard Money Loan?
- Your credit score or employment history isn’t great – Hard money lenders don’t care much about your past. They’ll secure your loan against the property’s title as collateral so that ding on your Credit Utilization Ratio won’t matter as much to them as it would a traditional lender.
- You’re planning to flip the property within 1-2 years – Since the interest rates on a hard money loan are much higher than a traditional mortgage, you’ll need to unload your property as quickly as possible. Hard money loans also typically require payment in full within three years of funding, so you’ll need to have a plan for how you can sell your investment property quickly.
- You need money within a month – Hard money loans typically take less than a month to fund, though the timeline is based on how responsive you are to giving your lender what they need to fund your loan.
- You need money to cover a gap in your financing – If you have a good chunk of cash, or have a business partner, you might only need a little bit more to make up the “gap.” Hard money is great for this.
- You’re buying this property as an investment – Hard money loans are based on the After Repair Value (ARV) of a home and not the current appraisal. Consequently, your lender expects to be paid back with a portion of the profits made caused by, you guessed it, the increase in value of the property. If there aren’t any profits to be made, don’t use hard money.
The Hard Money Loan Essentials: What You Absolutely Need to Know
I cover this in a few other posts, but there are things you must know about how hard money loans work before seeking a lender out. If you only pay attention to one section of this article, it needs to be this.
- Hard money loans are only for 5 months – 2 years. You might find a lender willing to go up to five years, but I’d say that’s probably the longest you can find.
- Hard money loans have higher interest rates than mortgages. In 2021, the average interest rate was 11.25% for a hard money loan. Mortgages, on the other hand, were 2.5% – 3%.
- Hard money loans use your property as collateral. Your lender will take a first position on the title. If you can’t pay the loan back, they’ll seize ownership of the property.
What Can I Use a Hard Money Loan For?
A big reason why deals fail is a lack of capital, which is why you want to ensure you have as much as you need, plus an extra cash cushion to cover any unexpected expenses when house flipping. Unexpected expenses always happen, and gap financing can get expensive. If you’re looking for funding (especially if you’re looking to 100% finance your investment), hard money is a great option, especially if it can pay for both the house and any rehab done.
So what can you do with a hard money loan? The short but incomplete answer is “whatever you want.” That said, to get approved, you’ll need to know what your lender is looking for and how they expect you to use their loan. Here are a few ways hard money loans are typically used.
BRRR Loans
BRRR stands for:
Buy
Renovate
Rent
Refinance
A BRRR loan is a particular type of hard money loan that’s paid back through the refinancing of a rental property, typically through a mortgage. While some hard money lenders do offer BRRR loans, it’s best to look for a lender with experience offering these since they’re usually more of a niche way to fund real estate investments.
Rehab Costs for Fix & Flips
Fix & flip properties are the sweet spot for hard money loans because the loans are short, designed specifically for renovation costs, and get funded fast. You’ll need to have an itemized scope of work that shows estimates from licensed contractors to get a fix & flip loan and might need to show prior experience with successful real estate investments. However, many lenders are more than happy to work with new investors, so don’t feel like you’re out of options if you’re looking for financing on your first investment property.
Rehab Costs for Single or Multi-Family Properties
Unlike BRRR loans, hard money loans for single or multi-family rental properties are more for upgrades or minor repairs to buildings you’ve owned for a while. Landlords will often use hard money loans for things like upgrading appliances, installing new on-site laundry facilities, overhauling the landscaping, or anything else that contributes to making the property more desirable for new tenants.
Renovations to Commercial Properties
Investors will use hard money loans for commercial properties they intend to either flip to another investor or keep as and run as a landlord. One caveat when it comes to commercial properties, though, is that they’ll often sit on the market for years at a time, whereas residential properties flip much faster. If you’re planning to use a hard money loan to flip commercial real estate, you’ll need to keep in mind that your carrying costs will be higher and your timeline much longer than flipping something like a single-family property.
Gap Financing
If you’re coming up short in your savings due to unforeseen costs or poor budgeting, hard money loans are excellent assets to have. Investors have used hard money in these situations to cover things like closing costs, emergency repairs, or when they need extra money for carrying costs while waiting for the property to sell.
Quick Turn-Around Funding
One of the biggest selling points for hard money loans is their fast turnaround time for funding, usually within a few business days. Many investors end up using a hard money loan in the middle of a flip rather than at the beginning because they’ll run into sudden expenses that need to be paid for quickly.
What to Look for in a Hard Money Lender
Now that you know what the ins and outs are for a hard money loan, let’s talk about finding the best lender for your business. There are a few key factors you should look for to ensure you’re getting the best deal possible for your loan. Here are the biggest things to keep an eye out for:
At Least 70% ARV for Your Loan
One of the most valuable metrics to determine the value and profit potential of a property is the ARV, or After Repair Value. ARV is calculated by estimating the amount of rehab that will be put on the property and by making a sale comparison on similar properties after appraisal.
The standard maximum percentage that hard money lenders are willing to fund is 70% of a property’s ARV, and anything higher than that is considered too risky. On average, though, most hard money lenders are only willing to offer up to 60-65% ARV, so do your research and find a lender who will provide you with the maximum amount available.
A Lender Who Covers 100% of Your Costs
The hard money lender you deal with will have different requirements for the types of deals they’re willing to fund, as well as different interest rates and points. But when you have 70% ARV, you’ll be able to fund not only the property but any rehab costs. Finding a lender who covers 100% of your purchase price and rehab costs ensures you’re not left scrambling for extra cash to cover emergency expenses, closing costs, or increases in material costs.
A Lender with House-Flipping Experience
Private lenders can offer you loans that are similar to hard money, but you’ll quickly realize how frustrating dealing with them gets when it comes to fix & flip investing. Unfortunately, it becomes a lesson in patience as you’ll most likely have to educate them on what costs are associated with house flipping and why you’re requesting the amount of money on your application.
Hard money lenders are specifically designed for the real estate investment industry and know this business inside and out. They’ll know what you need and why you need it and can help guide you through the process to ensure you don’t have any blind spots regarding the amount of money you’ll need for a successful flip.
The Top Hard Money Lenders and Their Rates
| Company | Minimum Credit Score Required | Experienced Required | Amount They’ll Fund | Origination Fees | Prepayment Penalty | Funding Time |
|---|---|---|---|---|---|---|
| The Investor's Edge | None | None | 100%, up to $350,000 | 5.5% - 6.5% | None | 15 days |
| RCN Capital | 650 | Two successful flips or have owned two rental properties within the past 36 months | 80%, Up to $5 million | 3% - 5% | 5% if repaid within the first six months | 10 days |
| Visio Lending | 680 | None listed | Up to $2 million | 1% - 5% | 5% if repaid within the first 12 months | 21 days |
| Lending Home | 660 | 0-5 successful flips in 24 months | Up to $3 million | 1.5%+ or $999+ | 1.5% - 2.5% | 5-15 days |
| Lending One | 680 | At least one successfully completed investment. | Up to 90% of purchases and repairs | Based on the individual property and borrower | None | 7 Days |
| Athas Capital | 550 | None listed | Up to $2 million | Not listed | None | Not listed |
| Abl1.net | 650 | None | Up to $2.5 million | 0% - 2% | None | Ten days |
| Anchor Loans | 600 | Five successful flips within the past 18 months | Up to $10 million | 1.5% - 3% | None | 1 - 2 weeks |
| Lima One | 600 | None listed | $50,000+ | 1% - 3% | None | 15 days |
| Rehab Financial | 620 | None | 100% | 2% - 5% | No | 14 days |
Final Thoughts
Finding the right hard money lender can get overwhelming when you’re going through all the available options, but it doesn’t have to be. When you’re ready to get a BRRR loan or gap financing, use this guide as a way to avoid getting scammed or paying more than you need.
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