Most fix-and-flip investors use hard money — short-term, asset-based loans from private lenders — to finance acquisitions and renovation costs. Hard money is expensive relative to conventional financing, but it closes in days, not months, and it's available to investors who can't qualify for or wait on bank loans. Understanding how hard money works, what it costs, and how lenders evaluate deals makes you a more effective borrower and a better underwriter.
What Is a Hard Money Loan?
A hard money loan is a short-term loan secured by real estate, issued by a private lender. The loan is underwritten primarily on the value of the property — the "hard" asset — rather than the borrower's income, credit score, or tax returns. This makes hard money faster to obtain and available to investors who are self-employed, have complex income, or are early in their investing career.
Hard money is designed for short-term use: typically 6–18 months. It's not a long-term hold strategy. It's the bridge between your acquisition and your exit, whether that exit is a retail sale, a refinance into long-term debt, or a sale to another investor.
Hard Money Loan Structure
A hard money loan has three components: the loan amount, the rate, and the points.
Loan amount: Hard money lenders typically lend at 65–75% of the After-Repair Value (ARV). A property with an ARV of $350,000 might support a maximum loan of $245,000 at 70% LTV. Some lenders also fund a portion of renovation costs (construction draws) up to that same ARV-based ceiling. Your ARV analysis directly determines how much you can borrow.
Interest rate: Hard money rates range from 9–13% annualized, with the current market in most areas running 10–12%. Interest is calculated on the outstanding loan balance and paid monthly. Hard money is interest-only, with principal repaid at payoff.
Origination points: Points are an upfront fee expressed as a percentage of the loan amount. Most hard money lenders charge 1.5–3 points. On a $200,000 loan at 2 points, the origination fee is $4,000, paid at closing. Points are a closing cost that comes out of your capital at acquisition, not your monthly payment.
Total Financing Cost Calculation
Total financing cost = points + monthly interest over your hold period + any extension fees. Investors consistently underestimate financing cost by using the rate without accounting for points and the full hold duration.
Example: $200,000 loan at 11% interest, 2 points, 7-month hold:
- Points: $200,000 × 0.02 = $4,000
- Monthly interest: $200,000 × (0.11 / 12) = $1,833/month
- Total interest (7 months): $1,833 × 7 = $12,833
- Total financing cost: $4,000 + $12,833 = $16,833
That $16,833 comes directly out of your profit. An investor who estimates financing cost as "$12,000" without the points starts with an $800 error that compounds into a deal that doesn't perform as underwritten.
What Hard Money Lenders Actually Look At
Hard money underwriting is faster than bank underwriting because it focuses on fewer things — but what it focuses on, it focuses on carefully.
The ARV
The primary underwriting metric. The lender orders their own appraisal or BPO (broker price opinion) to validate your ARV estimate. If your ARV comes in at $350,000 and the lender's appraiser says $310,000, your maximum loan drops from $245,000 to $217,000. That $28,000 gap in borrowing capacity comes out of your closing day cash or requires you to renegotiate the purchase price.
A disciplined ARV analysis before you talk to a lender matters precisely for this reason. If your ARV estimate is aggressive, the lender's appraisal pulls it back and you're surprised at closing. If your ARV estimate is defensible and conservative, the appraiser is more likely to confirm or come in higher.
The Rehab Budget
If you're requesting a construction draw facility — financing that covers renovation costs in addition to acquisition — the lender reviews your rehab scope and budget. Under-scoped or under-budgeted renovation plans are a red flag. A lender who funded a renovation budget that runs out halfway through has a problem loan on their hands.
A detailed, trade-organized scope of work with cost ranges from multiple contractor bids strengthens your draw request. Lenders who see a one-page "renovation budget: $75,000" with no line items are looking at a borrower who hasn't done the work.
Exit Strategy
Hard money lenders want to know how and when they'll be repaid. The two standard exit strategies: sell the renovated property at retail and pay off the loan from proceeds, or refinance into a long-term loan at stabilized value. For retail sale exits, lenders look at your ARV comps and the current market absorption rate. For refinance exits, they look at whether your expected LTV and projected rental income support conventional financing.
Borrower Track Record
Hard money is asset-based, but borrower track record isn't irrelevant. Lenders who have been burned by inexperienced investors who ran out of money mid-project pay attention to how many projects you've completed and what your outcomes were. First-time investors typically pay higher rates (12–13%) and lower LTV (65%) than experienced borrowers with a track record.
Construction Draws
When a hard money loan includes a construction facility, the renovation funds aren't disbursed at closing — they're held in escrow and released in draws as work is completed and inspected. The typical draw process:
- You complete a phase of renovation work
- You submit a draw request with supporting documentation (receipts, contractor invoices)
- The lender sends an inspector to verify the work is complete
- The lender releases funds — typically within 3–5 business days of inspection
The draw schedule matters for cash flow management. If you're funding renovation work out of pocket and waiting for draw reimbursements, you need enough liquid capital to bridge each construction phase. On a $70,000 renovation with 5 draws, you might need $14,000–$20,000 in bridge capital at any given time while waiting for reimbursements.
How Rehab Cost Estimation Affects Borrowing
Your rehab estimate directly determines how much you can borrow and what your deal economics look like. If your scope and the lender's assessment of your scope agree, the draw facility works smoothly. If they disagree — lender thinks your renovation budget is too light — you have a problem.
Underwrite your deal assuming the lender funds at the conservative end of their stated LTV range, and build your rehab estimate from a detailed scope rather than a rule-of-thumb guess. An AI-generated estimate from an inspection report gives you a defensible baseline — organized by trade, calibrated to your market, with risk flags for high-uncertainty items. That output is far more credible to a lender than a back-of-envelope number.
Investors who arrive at a lender meeting with a line-item scope and three MAO scenarios signal experience. Experienced borrowers get better terms.
Hard Money vs. DSCR Loans
DSCR (Debt Service Coverage Ratio) loans are long-term rental loans underwritten on property cash flow rather than borrower income. Investors sometimes confuse them with hard money because both come from private lenders.
Hard money: short-term (6–18 months), high rate (10–13%), used for acquisition and renovation. Exit is a sale or refinance.
DSCR: long-term (30-year), lower rate (6.5–9% depending on market), used after renovation for stabilized rental properties. The refinance from hard money into DSCR is the BRRRR strategy exit.
Choosing between a sale exit and a DSCR refinance depends on your market, your rent-to-value ratio, and your portfolio strategy. Both start with the same first step: an accurate rehab estimate that tells you what the renovated property will be worth and what it will cost to get there.