Hard Money for the Buy
Hard Money for the Buy
Hard money is bridge financing: expensive, short-term debt that covers the purchase and rehab phases until the conventional refinance takes over.
Key takeaways
- Hard money loans charge 10–12% annual interest plus 1–2 points upfront; costs are justified by speed and flexibility that conventional lenders do not offer.
- Hard money is secured by the property, not dependent on your credit score; approval is based on the deal strength (ARV, LTV, exit strategy).
- Loan terms are typically 6–12 months, with interest-only payments during the draw period, then full principal repayment at exit (via refinance).
- Lenders require proof of rehab completion and a signed lease before funding the final draw, incentivizing timely rehab and tenant placement.
- Comparing hard money offers requires careful reading: effective cost (points + interest + fees) varies widely; cheaper is not always faster or more flexible.
Why hard money exists
Conventional mortgage lenders require extensive documentation: tax returns, employment verification, appraisals, title insurance, homeowner insurance. The process takes 30–45 days. For a property requiring immediate acquisition and with active rehab underway, a conventional lender is not feasible; an appraisal of a partially rehabbed property is not reliable, and the time delay loses the deal to a competing offer.
Hard money lenders exist to fill this gap. They are non-bank investors (hedge funds, private equity syndicates, credit unions, or wealthy individuals) willing to lend based on asset value and deal quality rather than the borrower's credit profile. They close loans in 7–14 days, often without a full appraisal, and they release funds in tranches (draws) as work progresses.
Hard money is expensive. A 10–12% annual rate is 3–5 percentage points above conventional mortgages (6–7%). A $165,000 hard money loan at 11% costs $18,150 per year, or $1,512 per month in interest. Over a six-month period, interest cost is $4,536. Additionally, lenders charge 1–2 points upfront (1–2% of the loan amount, or $1,650–3,300), plus underwriting fees ($500–1,500) and appraisal fees ($400–800). Total upfront cost is roughly 2–4% of the loan amount, or $3,300–6,600.
This expense is painful to accept, but it is the cost of speed and flexibility. Over a six-month hard money period, your all-in cost is approximately 8–9% of the loan amount ($5,500–14,850 for a $165,000 loan). For a deal generating $50,000+ in equity, the cost is acceptable.
How hard money loan structure works
A typical hard money loan is interest-only during the draw period. You borrow $50,000 at closing (the down payment on the purchase), pay accrued interest monthly, and the lender releases additional funds as rehab progresses. Once rehab is complete and the property is leased, you refinance to a conventional loan, which repays the hard money lender in full.
The draw schedule is negotiated upfront. A common structure:
- Draw 1 (at closing): 50% of total loan amount.
- Draw 2 (after framing/inspection): 25%.
- Draw 3 (after rough-in/drywall): 15%.
- Draw 4 (at completion + lease): 10%.
Each draw requires the lender's inspector to visit the property and confirm work is complete per the plan. The lender withholds the final 10% draw until you provide proof of a signed lease at market rent.
Interest accrues daily. At 11% annual rate, a $165,000 balance accrues $150 per day in interest. If the loan is outstanding for 180 days, the total interest cost is $27,000 ($150 × 180). If rehab is delayed from 120 days to 150 days, the incremental interest cost is $4,500 (30 extra days × $150/day). This creates a powerful incentive to complete rehab on schedule.
Evaluating hard money offers
Hard money lenders typically offer multiple deal structures. Comparing them requires careful math.
Offer 1: 11% annual interest, 2 points, $800 appraisal fee, $1,000 underwriting fee.
Upfront cost: 2% + $1,800 = $3,300 + $1,800 = $5,100 (on a $165,000 loan).
Interest over 180 days: $165,000 × 11% ÷ 365 × 180 = $8,877.
Total cost: $14,000 (5.1% of loan amount + 5.4% annual interest for six months).
Offer 2: 10% annual interest, 1.5 points, no appraisal, $400 underwriting.
Upfront cost: 1.5% × $165,000 + $400 = $2,475 + $400 = $2,875.
Interest over 180 days: $165,000 × 10% ÷ 365 × 180 = $8,082.
Total cost: $10,957 (3.0% upfront + 4.9% interest for six months).
Offer 2 is cheaper ($3,000 less) and faster (no appraisal). But if Offer 1's lender is known for flexibility (allows extensions, has faster draws, is available for future deals), the premium may be justified.
Loan-to-value and advance rates
Hard money lenders advance funds based on loan-to-value (LTV) ratios. A common hard money LTV is 70–75% of the property's current market value (as-is, before rehab). If you are buying a property for $150,000 that appraises at $145,000 (as-is), a 70% LTV loan is $101,500. If your purchase plus rehab is $185,000, you need $83,500 of down payment.
Some lenders offer higher LTVs (75–80%) for experienced borrowers or very strong deals. A few offer "rehab LTV"—lending against the projected ARV, not the as-is value. If the ARV is $220,000 and the lender will advance 65% of ARV, you can borrow $143,000, covering most of your $185,000 total investment.
When evaluating lenders, ask about their LTV policy. A lender offering 65–70% of ARV is more favorable than one offering 65–70% of as-is value.
Multiple hard money lenders
Some BRRRR investors use multiple hard money lenders on the same property. For example, Lender A finances the purchase ($150,000 at 70% LTV of the as-is value). Lender B finances the rehab ($35,000 via a separate draw-based rehab line). At completion, a single conventional refinance retires both, and proceeds go pro-rata to each lender.
This approach is advanced and requires coordination, but it can unlock capital unavailable from a single lender. Most BRRRR investors use a single lender per deal for simplicity.
Exit strategy and extension risk
Hard money loans typically have six-month or 12-month terms, with the expectation that the borrower will refinance (exit via conventional loan). If your refinance is delayed—because the appraisal is pending, underwriting is slow, or the property is not yet leased—the hard money loan extends, accruing additional interest.
Most hard money loans are written with automatic extensions at the borrower's option, typically 3–6 additional months at a fee (0.5–1% of the loan balance). An extension on a $165,000 loan might cost $825–1,650. Extensions are expensive and should be avoided via disciplined project management, but they exist as a safety valve.
Some lenders have strict no-extension policies; if you do not refinance within the term, they can force a sale or accelerate repayment. Always clarify extension terms before signing.
Comparing conventional and hard money
Conventional mortgage (30-year fixed):
- Rate: 6–7% annual (current environment).
- Loan-to-value: up to 80% for rental properties.
- Closing timeline: 30–45 days.
- Documentation: extensive (tax returns, employment, appraisal).
- Prepayment: typically no penalty.
- Use case: permanent financing for stabilized rentals.
Hard money (short-term bridge):
- Rate: 10–12% annual.
- Loan-to-value: 60–75% of as-is or ARV.
- Closing timeline: 7–14 days.
- Documentation: minimal (deal plan, contractor estimates, comps).
- Prepayment: no penalty (expected).
- Use case: bridge financing for purchase and rehab phases.
Hard money is not a long-term financing solution; it is a tactical tool for the acquisition and rehab phases. The refinance to conventional financing is the goal.
Hard money lender evaluation
When selecting a lender, consider:
- Approval speed: Can they close within your timeline?
- Draw flexibility: Are they responsive to draw requests? Do they require inspections at each draw?
- ARV lending policy: Will they advance against ARV or only as-is value?
- Relationship: Are they available for future deals? Do they have a track record with BRRRR investors?
- Cost: Compare effective costs (points + interest + fees) across offers.
- Terms: Confirm loan duration, extension options, and prepayment terms.
Building a relationship with one or two hard money lenders is valuable. If you close three deals with Lender A in your first year, they understand your underwriting, trust your execution, and can quote terms faster for deal four.
Hard money and portfolio leverage
Over time, a BRRRR investor builds a portfolio of refinanced properties. As you accumulate conventional mortgages, your credit profile and net worth improve, and lenders may offer portfolio lines of credit. A portfolio line of credit (sometimes called a HELOC or line of credit secured by the portfolio) can reduce reliance on hard money by providing acquisition capital at lower rates (8–10% vs. 11–12%).
However, most BRRRR investors maintain a relationship with hard money lenders throughout their career, because hard money is still faster and more flexible for the acquisition and rehab phases, even if slightly more expensive.
Decision tree for hard money selection
Related concepts
Next
Once hard money is in place, the rehab phase begins. The accuracy of your rehab budget and timeline determine whether you hit the financial targets and close out hard money on schedule. The next article covers budgeting and managing the rehab project.