Hard Money Q&A with Scenario

Hard Money Q&A with Scenario

What Is a Hard Money Loan?   

A hard money loan is a short-term, higher-interest loan, that provides real estate investors with the ability to acquire and repair 1-4 family investment properties. These loans are typically for 6-12 months, with interest rates between 10%-14%, and loan-to-value ratios of 65%-75%, depending on the deal.


Why Is It Called “Hard Money?”   

Hard money is a 19th-century term that refers to gold and silver. When you hear the term hard money today, it almost exclusively applies to real estate lending, and simply means “tangible or readily available funds.” Despite the name, hard money is the easiest and fastest way to finance an investment property.


Why Is the Interest Rate Higher?   

Elevated interest rates in hard money loans can be attributed to factors such as easier approval processes, faster closing times, and the increased risk associated with properties requiring repairs. Borrowers can often secure approval within minutes, with transactions closing in just a few days.


Where Does the Money Come From?   

Lenders finance hard money loans through various sources, including money partners, bank lines of credit, debt funds, and their personal funds.


What Are the Benefits of Using Hard Money?

The ability to close quickly, leveraging your buying power, bringing less money to closing, along with the ability to finance distressed properties requiring repairs, are some of the benefits of using hard money.


Consider This Hard Money Loan Scenario:   

  • ARV (After Repair Value) of the house: $250,000  
  • Rehab/repairs needed: $75,000  
  • Purchase price: $112,500  


Formula for Out-of-Pocket Cost:   

Out-of-pocket = ARV × LTV - Repair Escrow  

Out-of-pocket = $250,000 × 0.75 - $75,000  

Out-of-pocket ≈ $10,000 (lender fees, title fees, hazard insurance)


What If You Paid All Cash?   

Paying all cash would require an initial investment of $193,500. This drains cash reserves and limits buying power for other deals. You will also need to wait six months before you can refinance to get your cash back (cash-out refinance). 


What About Small Bank Financing?   

Small bank financing typically offers 80% loan-to-cost (LTC) and therefore requires significantly more out-of-pocket costs compared to hard money loans. In the scenario above you would bring $45,500 to closing.


What About Conventional Financing?   

Conventional financing requires the property to be completely rehabbed before financing can occur. Small items like a water heater not connected, a required appliance missing, or a cracked window can trigger an underwriter to not approve the loan. Borrowers sometimes don’t realize this until right before they are supposed to close. That’s when the appraisal is reviewed by the lender and the loan gets subsequently rejected.



Hard money loans provide real estate investors with a flexible and efficient financing option, particularly for properties that need to close quickly and require repairs. While interest rates may be higher compared to traditional financing, the expedited approval process and ability to leverage buying power make hard money an attractive choice for investors seeking to maximize returns and minimize upfront out-of-pocket capital requirements.