Hard money loan
A hard money loan is short-term financing secured by real property, underwritten on the asset rather than on the borrower's income.
It is expensive on purpose, and it exists because conventional financing cannot do two things: move quickly, and lend on a property in poor condition.
What it costs#
Points at closing, each one percent of the loan.
Interest, typically in the low double digits, often interest-only.
Fees — origination, underwriting, draw administration, extension.
Worked through: a $200,000 loan at 2 points and 11 percent, held for nine months costs $4,000 in points and $16,500 in interest. $20,500 total, which annualises to roughly 13.7 percent of the loan amount.
That number belongs in the deal arithmetic from the beginning, not as an afterthought. On a project with a $40,000 expected profit, financing has just taken half of it.
What it buys#
Speed. Days rather than weeks. At an auction, a sheriff's sale or a tax-forfeited land sale where funds are required immediately, conventional financing simply cannot participate.
Condition tolerance. Conventional and FHA lending applies minimum property standards. A gutted, condemned or seriously deteriorated property fails them. Hard money lends against what the property will be worth, not what it is.
Simplicity. Less documentation, less scrutiny of personal income, faster decisions.
What it is not#
Long-term financing. Terms run months, not years. The loan matures and has to be repaid, refinanced or extended.
Forgiving of delay. Every month costs interest, and extensions cost fees. A project that runs three months over on a nine-month loan has added materially to its cost and may be facing maturity without a finished property.
The exit is the whole thing#
Hard money is a bridge, and a bridge needs somewhere to land.
The exit is a sale or a refinance into conventional financing. Both depend on completing the work and on the after-repair value holding.
A borrower whose renovation overran, whose ARV came in low, or whose market moved has a maturing expensive loan and no exit — which is how hard money borrowers end up losing properties they were close to finishing.
Plan the exit before drawing the loan, and build a margin into the timeline rather than the best case.
Prepayment terms#
Read them.
Consumer restrictions on prepayment penalties largely do not apply to investment property, and hard money notes frequently carry minimum interest provisions — a guaranteed number of months' interest whether or not the loan is repaid earlier.
A project finished in four months on a note with a six-month minimum pays six.
Our hard money calculator works the total cost including points, interest and the holding period, which is the figure that belongs in the deal rather than the rate on its own.