Quick overview

Hard money and private lending are two nontraditional financing paths real estate investors commonly use when time, flexibility, or imperfect borrower credit make conventional bank financing impractical. Hard money is normally offered by specialty lenders or private funds; private lending describes loans made by individuals or small groups (friends, family, private investors). Both rely heavily on the collateral value of the property and customized loan terms.

(For a deeper look at short-term use cases, see FinHelp’s guide: “Hard Money Short-Term Loans: Use Cases for Real Estate Investors” — https://finhelp.io/glossary/hard-money-short-term-loans-use-cases-for-real-estate-investors/.)

How they work in practice

  • Collateral-focused underwriting: Lenders evaluate the property’s present value or after-repair value (ARV) more heavily than the borrower’s FICO score. Typical loan-to-value (LTV) ranges are 50–75% of loan-to-value or 60–70% of ARV for renovation deals, though numbers vary by lender and risk.
  • Short terms and higher cost: Loan terms usually span from 3 months to 3 years. Interest rates are higher than conventional mortgages — commonly 8–15% or more as of 2025 — plus origination fees (points) that often range from 1%–6% of loan amount. Some lenders also charge additional processing or inspection fees.
  • Exit strategy required: Most investors use hard money to bridge to a sale, rental conversion, or refinance into a lower-cost permanent loan. Lenders will expect a documented exit strategy before funding.
  • Speed: Funding can take days to weeks, versus weeks or months for traditional banks. That speed is a primary reason investors accept higher costs.

Who uses hard money or private lending?

  • Fix-and-flip investors who need to purchase and renovate quickly.
  • Buyers at auction or off-market sellers who must close fast.
  • Borrowers with recent credit events (short sales, foreclosures, bankruptcies) but with valuable collateral.
  • Small-business owners or developers who can persuade a private investor with the project economics.

In my 15+ years in financial services, I’ve seen experienced flippers rely on a well-structured hard money bridge for multiple projects per year; when underwriting and exit planning are solid, the higher cost is often offset by the project’s profit.

Typical terms and sample structure

  • Loan-to-value (LTV): 50–75% (sometimes lower for very distressed properties)
  • Term: 3–36 months
  • Interest: 8–18% (depends on market, lender, and borrower relationship)
  • Points/Origination fee: 1–6 points
  • Fees: Underwriting, appraisal, and inspection fees commonly added
  • Collateral: First or second deed of trust; personal guarantees are common in private deals

Example: A lender offers $200,000 on a $300,000 ARV property (67% ARV), 12% interest, 2 points origination, 12-month term. The investor plans to renovate and sell in 9 months.

Tax and reporting considerations

Interest on loans used to acquire or improve rental properties is generally deductible as a rental expense — see IRS Publication 527: Rental Income and Expenses (https://www.irs.gov/publications/p527). If the loan finances a business (e.g., a fix-and-flip treated as inventory), interest treatment can differ and may be a business expense (see IRS Publication 535: Business Expenses — https://www.irs.gov/publications/p535). Always confirm with a tax professional; tax rules can be nuanced (and vary by entity type and treatment of the property).

Regulatory and consumer-protection notes

Nonbank and private lending operates in a patchwork of federal and state rules. The Truth in Lending Act (TILA) still applies to many consumer-purpose mortgages, requiring clear disclosures of APR and costs; however, investor-purpose loans or private deals can fall into different regulatory categories. State usury laws, licensing requirements, and foreclosure procedures vary widely — check state regulators or NMLS rules for mortgage lenders in your state. The Consumer Financial Protection Bureau (CFPB) publishes guidance on mortgage and nonbank lending practices (https://www.consumerfinance.gov/).

Due diligence checklist for borrowers (practical steps)

  1. Request a complete term sheet showing APR, points, fees, prepayment penalties, and trustee/title costs.
  2. Verify the lender’s license and track record; ask for sample closings and references.
  3. Hire an independent appraisal and get a contractor’s bid to confirm ARV.
  4. Confirm all fees in writing and understand how interest accrues (simple vs. compound, monthly vs. daily).
  5. Draft a clear exit strategy with timelines: sale, refinance to conventional mortgage, or conversion to rental.
  6. Check title insurance and property insurance requirements; confirm who pays escrow for taxes and insurance.
  7. Read the default and foreclosure terms carefully; some hard-money contracts allow swift foreclosure or loan acceleration.

Due diligence checklist for lenders (practical steps)

  1. Confirm borrower identity, legal entity, and authority to sign (especially for LLCs).
  2. Run independent valuation or appraisal; require proof of contractor’s scope when funding renovations.
  3. Use clear loan documentation and record the deed of trust or mortgage.
  4. Consider seasoning clauses, reserves for repairs, and draw schedules tied to inspections.
  5. Assess exit viability: borrower credit/refinance history, local market comparables, and planned sale strategy.

Negotiation tips and structuring tricks

  • Reduce interest by offering a lower LTV or stronger borrower equity contribution.
  • Propose a short-term interest-only structure to reduce monthly cash needs during rehab.
  • Offer performance incentives (e.g., reduced interest if paid off within X months) to align incentives.
  • Use a personal guarantee or collateral from other assets to lower lender risk and cost.

Common mistakes and red flags

  • No written exit strategy: lenders want to see credible repayment plans.
  • Ignoring title issues: unresolved liens or easements can derail a sale or refinance.
  • Accepting vague or oral promises: always require terms in writing.
  • Neglecting permits and code compliance: post-closing problems can reduce value and complicate lender recourse.
  • Failing to compare offers: rates, points, and fees differ significantly across lenders.

For warning signs of abusive terms or scams, see FinHelp’s guide on how to spot predatory lending (https://finhelp.io/glossary/how-to-spot-predatory-lending-and-what-to-do/).

When hard money or private lending is a bad fit

  • Long-term buy-and-hold investors focused on low-cost financing generally should avoid short-term hard money except for a narrowly defined bridge.
  • Small loans where fees overwhelm capital: if the loan size is too small, origination points and fixed fees can make the economics unfavorable.
  • Poor project economics: if projected after-repair value minus costs doesn’t provide a comfortable buffer, the higher financing cost increases the chance of loss.

Exit strategies (practical examples)

  • Refinance to a conventional mortgage once repairs are complete and borrower qualifies; this converts short-term debt to lower-cost long-term financing.
  • Sell the property as a flip and pay off the loan at closing.
  • Convert to a rental property and refinance using an investment-property mortgage (if cash flow is sufficient).

Real-world examples (anonymized client cases)

  • Case 1: An investor bought a distressed unit at auction using a one-month hard-money bridge and closed within 28 days. Extensive planning and a contingency budget allowed renovation and resale within six months for a profitable flip.
  • Case 2: A small-business owner used private lending from an investor group to buy a mixed-use building. The terms were flexible, and the group accepted a higher LTV in exchange for a second lien and higher coupon. Their documented business plan and projected cash flow convinced private lenders of the deal’s viability.

Bottom line: when to consider these options

Choose hard money or private lending when speed, collateral-backed risk assessment, and flexible underwriting matter more than lowest possible interest cost. They are tools — not permanent solutions — best used with a clear plan, conservative valuations, and full documentation.

Professional disclaimer

This article is educational and does not constitute individualized financial, tax, or legal advice. Rules and tax treatment can vary by state and by borrower circumstances; consult a licensed mortgage professional, attorney, or tax advisor for guidance tailored to your situation. Author experience referenced here is based on professional work in the financial services industry.

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