8 Things The Real Estate Experts Won’t Tell You About Hard Money

by | BiggerPockets.com

The biggest issue I hear when it comes to starting a house flipping business is “I have no money”.

In fact, the second reason is so far behind this one, it doesn’t even register as a legit number two.

Sure, there’s fear, “knowing what steps to take” and “where do I start” reasons why people don’t start flipping house (all legit reasons by the way).

But the “I have no money” reason is the number one reason why people don’t get started flipping houses.

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Enter Hard Money…

There are many ways to flip houses with not a lot of your own money, but the one source that’s overlooked the most is hard money.

The majority of new investors have no idea about the benefits of using hard money. I’m not exactly sure why this is – but I think it’s because many investors think it’s a dirty source of money or has some kind of underworld connotations.

Not true at all.

Hard money lenders get a bad rap…and they shouldn’t.

“Hard Money” = Bad Money?

Sure there are some hard money lenders who are predators and want to see you fail so they can take advantage of you. I’ve met a few, so I know they’re out there.

But those guys are way in the minority.

The majority of hard money lenders are legitimate businesspeople looking to fund legitimate projects without taking advantage of you, the new house flipper.

The truth is I never could have started my house flipping business were it not for hard money lenders. Some of whom started as merely business associates but now I consider them dear friends.

But I’m here to dispel those myths and call out hard money lender for what they are – a great source of funding for your flips.

And knowing a little bit more about them may just help you get that funding for YOUR first flip.

8 Things The Experts Won’t Tell You About Hard Money

The following are 8 things you really need to know about hard money, that the so-called “experts” never tell you about! Let’s get into it!

1. Hard Money Is a Legitimate Business

Yes, it’s true, hard money lenders are actual business people.

Hard money is basically a business or an individual who lends as a business.  What that means is that they’re no different than a bank – to some degree – because they in essence do what banks do, they lend money.

There is nothing scary about hard money but misperceptions of the “legitimacy” of these businesses exist. I think some would be house flipper think hard money is money borrowed in the underworld or something like that.

If you think this way, then I’m glad you’re reading here…because quite frankly, I didn’t know the term either until I started investing.

But the truth is that hard money lenders are legitimate businesses run as LLCs, S Corps or Sole Proprietorships with a definite business structure and specific strategy to invest. A bank does the same sort of thing, but with a hard money lender you don’t have to be approved by home loan review committees and all the bureaucracy that’s involved with a bank.

With hard money lenders, it’s just you, your deal and the judgment of the hard money lender to determine your ability to repay the loan.

2. Hard Money Just Means The Loan is Backed By a “Hard” Asset

I didn’t know this one when I first started flipping houses either

I thought the “hard” part was…well, I don’t really know what I thought. I just thought it meant there was some kind of “hard danger” in dealing with people like this.

How wrong I was…

The word “hard” just means asset. So when you borrow money from the hard money lender he secures his interest with collateral which is the “hard” asset – in our case, it would be the real estate.

When you think about it, banks lend money in the same way. Although nobody calls them “hard money”…

3. You Can Make Significant Profits With Hard Money Loans

Yes, hard money lenders do charge higher than average rates for a loan, no doubt about it.

But it doesn’t mean you can’t profit – especially if you’ve done your house flipping math correctly by factoring in this “soft cost” to your equations. When you do this successfully, you can still make a nice profit.

In fact, one of my best house flips was funded by a hard money loan…so you can definitely make good money on house flips from hard money.

With hard money, you could be looking at rates of 12 to 18% along with 2-6 points. Pretty high rates, no doubt – but you can still make money even with those costs in your math.

So you want to be cautious when using hard money.  You want to be able to look at your numbers when going into a property and analyze it, knowing full well your cost on borrowing that money.

If you know your numbers cold and factor in your financing cost and still come out ahead per the 70% Rule, then hard money is a good funding source for you.

4. Hard Money Loans Do Work for Longer Rehabs

If you happen to get into a deal where you’re paying an interest rate of 15% with 3 points, you’ll want to calculate that in a deal analyser and run the math and really see what that cost of money is going to be for different time scenarios.

Run those numbers out for six months and really see what they come out to. Then take all your soft costs, one of which would be your hard money interest, add in the real estate commission of 5%, and all your other costs. These holding costs include utilities, taxes, as well as any maintenance that’s needed.

Then add up all those costs and then see what that number comes out to.  Run them for 12 months too – so you can plan your exit strategy in advance.

If you still are in the black under this longer term “worst case” scenario, then hard money is a good funding source for you.

5. Hard Money Rates are High…But Here’s Why

Why do hard money lenders charge such high rates? There’s a reason for that.

Hard money lenders know that house flippers coming to them are not going to be able to borrow money from a bank. It could just be that their credit might not be great or it could be that maybe they just didn’t report income on their tax returns like they could have or should have.

Related: What Would You Do With This Evil Hard Money Lender?

Whatever the reason, the rates are high for a reason. They need to protect themselves from downside risk with you, so in taking that risk, the money they make should be higher.

No risk, no reward.

6. Legitimate Businesses Do Business With Hard Money Lenders

There are many reasons why people can’t do business with the banks and just because you may not be able to get a loan from a bank does not mean that you’re not bank-worthy per se.

All it just means is that with the strict guidelines, it’s harder for banks to lend money out even if they feel good about lending the money to an individual.

Maybe it’s a small business and they did some creative financing with their accountant and the bank’s like, “Well you say you made $100,000 but it shows you made $50,000.”

If this is the case, it means you may be very bankable but because of how your tax returns look, you become ill suited for a traditional loan.

This is the reason why so many legitimate businesses use hard money loans – not just in real estate – but in all forms of business. This includes funding for capital equipment and for continuing operations.

Hard money is not just a real estate thing, it’s for all kinds of business financing as well. In many cases if a business owner cannot secure traditional loan funding from a bank, they turn to hard money. Whether it’s for a business owner to buy or lease new equipment, purchase supplies and inventory or remodel their offices, many business use hard money loans just like us real estate investors.

7. Hard Money Lender Typically Won’t Finance 100% of the Loan…But That’s OK

There’s a phrase called “do you have skin in the game?”

What that means is nothing more than, “are you putting any money into the deal?”

Most hard money lenders will want to know if you have skin in the game.  If you don’t, they typically will not loan you the money – UNLESS they’ve done business with you before.

The truth is that when you talk to a hard money lender and you have no cash, then they will look at you a little bit differently.

I’m not saying they won’t do the deal in all cases, but I can tell you that when you have your own cash in the deal, they know you have a lot more riding on the deal and are far more likely to fund it.

When you have “skin in the game”, they know their interests are protected because you don’t want to lose your money as much as they don’t want to lose theirs.

It stands to reason. If you were a hard obey lender, would you want to lend to a house flipper who has no money to lose?

You probably wouldn’t…but don’t let that stop you. Even with no money, you can get the deal done.

8. If You Have Zero Money, You Can Still Get The Deal Done

In the beginning, you need to have skin in the game. But funding that portion of the deal through any of your own resources isn’t as difficult as you would think.

Related: BP Podcast 050: Getting Started and No Money Down House Flipping with Mike Simmons

You probably have at least one of these: some savings, equity line of credit, credit cards or whatever means you have to put up the percentage required.

If you don’t, all is not lost.

It just simply means you will have to work a little harder than someone that has money to invest but that shouldn’t stop you. You just need to get creative.

You could fund your portion through a friend or a family member or a business associate or a partner.

With the hard money lender’s loan, the good news is that the amount you need to borrow is a far smaller amount of money than before the hard money loan.

This can be the difference between looking for thousand or tens of thousands of dollar and looking for multiple hundreds of thousands of dollars, depending on your geographic area.

The smaller amount is far easier to raise than the full amount – and between the two, you’ll have full funding for your flip.

If you’ve made it this far, please leave a comment below! Ask me any question regarding hard money lending or flipping houses with no money… I’d love to hear what you think!

Be sure to leave your comments below!


About Author

Mike LaCava

Michael LaCava is a full time real estate investor, house flipping coach and the President of Hold Em Realty located in Wareham, MA. He runs the website House Flipping School to teach new real estate investors how to flip houses and is the author of "How to Flip a House in 5 Simple Steps".


  1. Nice job with the explanation, Mike. It amazes me with the proliferation of hard money companies, that most people still think that “hard money” means “hard to get” or “hard to get out of” or “hard arsed”.
    There are of course predatory lenders, but with the strong network we have in Massachusetts, it is pretty easy to ask around and avoid the bad apples.
    Thanks for helping set the record straight.

  2. Thank you so much for the in depth explanation about hard money. I found humour in your article because I did think that there was some danger involved in borrowing from hard money lenders. I lived in Singapore for 10 years where the hard money lenders are also known as Loan Sharks. When people could not pay, gangsters would come and splash red paint with threats all over their apartments – the first sign of warning to pay up or else. Usually it would end in some sort of criminal activity, which was where I got my perception from. Glad to hear that hard money is completely different here!

    • Wow. Haven’t heard of anything like that around here. There is danger in a different sense Grace.
      People get excited when they find they can get hard money and they don’t quite understand the expense in borrowing at a higher rate and not preparing to have an exit strategy way before the loan is due. You don’t’ want to be deciding what you are going to do with 30 days left to pay.
      Are you using any hard money or soft money for your deals?

  3. Wow I didn’t know it was that bad. Everyone in my area loves hard money. Infact I have yet to talk to someone that has used something other than hard money. Their idea is to use a little as your own money as possible and save your own capitol for when you absolutely need (like for down payments). The less of your own money that you use, the higher your COC return ratio will be, and also the more projects you will be able to handle.

    • I agree if you can use less of your own cash the higher COC return however you must do with great responsibility. You must be a good steward of other peoples money especially if it just private money where you set the terms.
      Thanks for you comment Ethan.
      What are the typical rates you pay in your area?

        • Thanks for your comments. Those are typical around here as well. I pay much less just do to my experience and negotiating. If you can try and drive down the points before rate.

    • There is money everywhere and used in many different ways both traditional and creative.
      I know some guys lend money against company receivables & real estate now.
      Are you using any hard money to fund your deals?

  4. Great article! As Builder/developers we have used hard money lenders many times over the years in the development of homes, office buildings, office parks, etc. People have a variety of reasons for using hard money. For us, building “spec”, meaning there’s no end user or buyer lined up ahead of time, in addition to our deals being “new construction, which add up to “higher risk” for the lender.

    The rate lenders charge should be relative to the risk. I see many of the so called hard money lenders that want all the same things a bank wants, (high credit scores, buyers/tenants already in line, skin in the game, etc.), but want to charge high points and interest.

    When you are looking for money, you want to know that your deal can support it, and that the lender has experience with the type of the deal you are doing. (such as new construction), Fix and flips are relatively simple deals. When you get into more complicated deals, experience matters.

    I will say, we haven’t paid over 12% for money, and the points have been up to 4%, nowhere near where I see some lenders come in. We’ve also had deals funded 100% (land purchase and construction) because the lenders liked us, our deals, and experience.

    • Thanks for sharing how you have used hard money Karen. Excellent.
      I to now have many deals funded 100% by hard money. Once they do business with you and you prove yourself you can get 100%.
      I am looking at some possible development deals but talking with the banks on funding because of the lower rates but it is be great to have choices if the banking gets too difficult.
      Maybe you can tell us a little how you structure a development funded deal with HM.

  5. Nice article, I was thinking of using a Hard Money Lender but for the life of me couldn’t figure out how to, seeing I am new as well in that area. I don’t know anyone who can help me on the Skin in The Game aspect, the one person I know who could have was my dear old dad, but he passed away a few years ago so now I am left on my own. I can find the houses that needs fix and flips no problem, I even can get a Realtor lined up to sell the property no problem, I can even figure the costs even without a GC (I use to be a Real Estate Agent once upon a time) no problem, but my problem is coming up with skin in the game (I don’t make enough money at my job to cover my portion). So how does a newbie who has no money to speak of and severly limited on that scope able to use a Hard Money Lender to fully fund the deal even when they do a 70% to 80% ARV and the investor has no 30% to 20% to fund the rest?

    • Hi Richard. Check out some of my other blogs here and my website as we get a lot more in detail on how to do that. One way is to give up equity on the deal. For instance ask the hard money lender if he would be interested in funding a deal 100% if you were to do all the work in finding the deal and managing the renovation process and sale of the property. In exchange you will give him or her 50% of the profits generated. It is a win-win and they make money than they would if they were getting interest only. You must be prepared and be able really show the profit potential in the deal. You could also partner with a contractor with money or a little money. If they have a good amount they may be able to fund the renovation portion which will allow you to get financing for the acquisition more easily or the contractor may be able to just fund the 20-30% of skin you need to do the deal . You just have to be creative. The are people everywhere looking to make money so find the deals and present the opportunities. Expand your thinking and believe in yourself and you will make it happen.
      Let me know how you make out.

  6. Lots of great points Mike.
    Most people don’t really seem to get exactly what Hard Money is.
    Yeah the terms might be “Hard to Swallow” sometimes the fact is they are loaning based on the value of the Hard Asset.
    It is also good you dispel some of the misconceptions especially the ALWAYS needing to have cash for your skin in the game.
    In my case the HML I use actually did our first deal at 100% except for I think around $1,100 for a few last minute HUD-1 things. I didn’t have a lot of cash at the moment and didn’t have the strong relationship we do now, but what I did have was another unencumbered rehab that I fully funded with other sources that I let him put a 1st lien on.
    Now he was totally secured and I did a deal I would not have been able to do otherwise, and now we have a great relationship and he has lent on some deals for me that would NOT fit his normal criteria.

  7. Thank you for the information. I will look for your other articles. I have considered house flipping but I feared being taken advantage of by the hard money lenders. How do I find one that is not a predatory lender, what signs should I look for, etc…? I have never done anything like this before but I am about 8 years away from retirement and realize retirement income is not what I thought it would be.

    • I would ask for references. When you go to the REIA meetings in your area ask other investors if they use hard money lenders. Always have your attorney review the promissory note to make sure you have reasonable terms in the agreement that protect you as well.

  8. Julian Robinson

    Thank you Mike for the valuable tools and information. I am new to BP but happened to catch the podcast 009 with Ann Bellamy and read this article. At the end you did say to leave a comment, so here it goes.

    For those who don’t have much in regards to their reserves or family around them in their respective areas, would it not be wise to go at flipping or investing long-term without having talked over gaining reserves with them first? From reading so far, I have learned networking to be one of the most important areas to touch on before stepping out for your first experience.

    Also, for those fresh out of a university though in a different career field, is it a wise decision to work towards investing whethe it be rehabbing or long term? As with most graduates who have college loans, money is hard to come by right out of the gate, especially for a given endeavor outside of your job.

    Thank you again!

    Best regards,

  9. Charlene Parker

    Thank you for putting together this post. I feel I came across it at just the right time as I am starting to consider going this route for my property. I purchased a solid, but dated property with the intention of updating and selling under a VA loan. I currently live in the property. I owe roughly 140K and it was recently appraised at 202K as is. The previous owner paid over 260K. A rough estimate of ARV is around 230K I attempted to get a HELOC to cover the costs, but was declined because I could not produce some documents (they were electronic and lost due to reasons beyond my control). I have been trying to find alternative funding and maybe this is just what I need. Thanks again.

  10. We use hard money (aka; private, angel or mezzanine) often for helping investors make flip properties happen. I myself have purchase several homes to flip that needed to close in just a few days making it very difficult to get institutional funds together in time.

    I like to use simple math: what is the profit versus my cost and in what time frame? I might get less expensive funds from a bank in 30 days or less but the seller needs to sell NOW. Hard money is an opportunity cost.

    Also, if you look at your profit vs dollars in when using hard money your IRR is much higher.

  11. I’ve heard of people using hard money before but I was never sure on what exactly it was or how it could be used, but your post has answered that questions for me. From what you wrote it looks like partnering with a hard money lender can have great benefits like flipping houses for a profit like you have done. I’m interested in looking into this further, thanks for the helpful money lending tips.

  12. John C.

    Thanks for the article
    I’m just starting to look into loaning out money to flipper friends and was worried about how safe it is. Going to meet with them soon to talk over details

    I guess it depends on the terms spelled out in the promisorry note. But, is it always backed up by a certain project? Or for general purposes? Is it always backed up by a hard asset? Or are some more like personal loans?

    Thanks for any info

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