Hard Money Loan: Short-Term, Asset-Based Financing

A hard money loan is short-term financing secured by the property itself, from a private lender rather than a bank. It is fast and expensive, and it exists to solve timing problems a conventional lender cannot.

Typical terms

Lenders typically size the loan against after-repair value (ARV), not the purchase price, which is what makes it usable for a renovation deal.

An example

A US$90,000 purchase needing US$30,000 of work, with an ARV of US$160,000. A lender at 70% of ARV could lend US$112,000, covering purchase and most of the rehab. At 11% interest-only plus 2 points, nine months costs about US$9,240 in interest and US$2,240 in points, roughly US$11,500.

That is a lot of money. It is only worth it if the renovation creates more value than it costs, and if you exit on schedule.

When it makes sense

• BRRRR deals, where you buy and renovate on hard money then refinance into a long-term loan. See the BRRRR method
• Properties no conventional lender will touch yet, because of condition
• Genuinely time-critical purchases where a 30-day close loses the deal

The risks

The exit is the whole deal. If the refinance appraisal comes in low, or the renovation runs three months over, you are paying 11% on a property that cannot yet carry it. Hard money punishes delay in a way a 30-year mortgage does not.

Two other things to check before signing: whether there is a prepayment penalty (it defeats the purpose), and whether the loan is recourse. Many are, meaning the lender can pursue you personally rather than only taking the property.

This is not a tool for a first rental bought to hold. For that, a conventional loan or a DSCR loan is cheaper and far less fragile.

Related reading

The financing options rundown sets the loan types side by side.