Why I Wish I’d Started Using the Wealth-Building Abilities of Hard Money Earlier

by | BiggerPockets.com

Recently, I was having a discussion with someone who was pretty adamant that hard money rates were too high. He even felt that hard money interest rates were the reason that some investor projects failed. Several years ago, there was a time and place where I probably had similar feelings about hard money, and I did everything in my power to avoid using hard money or private money. Instead, I would more or less try to self-fund. I mean, why is hard money so hard, right?

In hindsight, I realize that I was just looking at things like interest rates and some of the hard money terms, but I’m not so sure I was looking at the potential lost opportunity cost. By that, I mean that I could have built wealth and grown my portfolio faster if I had only used more hard money sooner.

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Why Hard Money Exists

So, what exactly is hard money, and why does it exist? Not sure I know where the term “hard money” came from, but it’s money that is lent to someone looking to purchase a renovated property that traditional bank financing normally won’t fund. Typically, it’s a short-term rehab loan that’s backed by the property more so than the borrower.

The other day, I was speaking with a young man who had gone through my recovery house a few years back, but he was doing much better in his job and side business, and he wanted to try to buy his first property. He was thinking about buying a bank owned — or in other words, a real estate owned (REO) — property. I had to explain to him that these were often sold for cash “as is” and that traditional banks won’t normally lend on them, unless you’re in the commercial real estate development business with a track record. I also told him that although banks won’t typically lend on a deal like this to newbie real estate investor, a hard money guy might.


Related: How I’ve Used Hard Money to Successfully Grow My Real Estate Business

When I first heard of hard money (and its usual terms), I wasn’t all that crazy about it. Today, after doing private money for the last 15 years to rehabbers I know (private money is very similar to hard money, just with easier terms), I realize that every one of these terms is there for a reason. First of all, hard money interest rates are based on what the market is paying and are oftentimes negotiable. They’re usually short-term. They have penalties built in (for a reason). If you go over the timeframe, there could be more points involved (a point is 1% of the loan amount) due to the additional risk and tie up of capital.

Some require pre-payment penalties for paying the loan off too soon. Otherwise, the hard money person wouldn’t make any money for all the hassle of setting up financing for the deal.

Fees and terms can also be based on the track record and experience of the borrower. A really good clue to whether you’ve found a good deal or not is if a hard money lender will lend on your project. If they won’t, you usually don’t have a deal.

Many of them want you to have skin in the game, and oftentimes they will only lend up to 65% of the after repair value (ARV). Some even require money in escrow until the project is completed.

Of course, they want a note, a mortgage, usually a deed in lieu of foreclosure, and sometimes a confession of judgment, as well as title insurance and to be named insured on the homeowner’s insurance policy. The good news for the newbie borrower is that hard money lenders usually have expertise in the space and that they can stand to learn a lot from the hard money lender.

Part of a Deal is Better Than No Deal

About two weeks ago, I funded a private money deal for a buddy of mine, and the numbers were pretty good on it. His purchase price was $35K and repairs were approximately $45K, which includes three $15K draws (a draw is an amount of the loan disbursed usually after a portion of the work is completed), and it’s worth approximately $130K after it’s fully renovated and rented.

Does my borrower have the money to take down and renovate this deal on his own? The answer is probably not since my buddy is doing several deals at once. This is a deal he plans to keep, and I don’t blame him — it’s in a nice part of town with good rents.

For me, a tired landlord, it’s a good, safe deal with a high yield. For my buddy, after refinancing through B2R Finance and getting all the capital back to pay me off for acquisition, rehab costs, and closing costs (0% out-of-pocket), it’s an infinite rate of return.

So, after all, what’s so hard about that?

Making Money on the Draw

I’ve probably mentioned this before in previous articles, but I never really understood hard money until one day I was having lunch with a buddy who had well over 100 properties and was more experienced than me in this area. He was telling me how he had bought his first 39 properties with hard money, and that’s what really jumpstarted his business and enabled him to eventually leave his day job.

I remember asking him what would possess him to do so many hard money deals. He said that it just became easier over time. He and the lender got into a rhythm, and they trusted each other. The terms became more favorable. Most importantly, he began to make money on the draw.


Related: 4 Ways to Use Hard Money & Private Financing for Your Rental Business

Looking back, this was really an “ah-ha” moment. When I asked my buddy what he meant, he explained, “Well, if the next draw was $10K (for the next block of rehab work to be completed) and I got the work done for $6K, I’d get to put the $4K in my pocket tax-free since it was a loan. Then, the bank would refinance me (after I put the tenant in the property) with a more normal term loan since it’s fully renovated and rented now, and that would give me the money to take out the hard money lender.”

Now everything began to make more sense, and I started to realize how much time and money I wasted not using more hard money.

Today, as a private money lender and owner of many notes, I think I’ve gotten over it. But as a note guy, I’ve always had a special respect and place in my heart for the successful real estate investor turned hard money lender — because after all, they’re giving back (and making money, too) by helping other real estate investors do deals. They also help society by turning around blighted properties and neighborhoods.

So, let me ask you, when are you going to use hard money, or private money, to do more deals? Will that lead you to one day becoming a hard money lender yourself?

Let me know your thoughts with a comment!

About Author

Dave Van Horn

Since 2007, Dave Van Horn has served as president and CEO of PPR The Note Co., a holding company that manages several funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, a real estate investor, and a fundraiser. As the latter, Dave has raised over $100 million in both notes and commercial real estate. In addition to his investments and role as CEO, Dave’s biggest passion is to teach others how to share, build, and preserve wealth. He authored Real Estate Note Investing, an introduction to the note investing business, helping investors enter the “other side” of the real estate business.


  1. Derek Caffe

    Dave, thank you so much for this article. I purchased my first two duplexes through traditional bank financing last year and recently quit my job in March 2016. I haven’t sought out any additional multifamily properties since, because I knew bank financing isn’t an option currently.

    I knew about hard money lending, but feel like you originally did. I’ve told myself I’m going to pursue hard money lending, but have been dragging my feet due to lack of confidence. This article got me excited again, that investing in additional multifamily buy and hold properties is still a possibility. Really appreciated!

    • Dave Van Horn

      Thanks Derek and good luck! And remember, using Hard Money can just be the start. Get comfortable, build your list, and as your relationships develop you’ll get lower rates.

      Then depending on your endgame, one of your next steps could be either becoming a hard money lender yourself or you can raise private money for larger commercial deals.


    • Dave Van Horn

      Thanks for chiming in Andrew!

      I agree to an extent, especially if you can get it. And if you can’t, Hard Money is always there. But I wouldn’t always get stuck on the rate, if it’s quicker to get Hard Money instead of Private sometimes it makes more sense to go with the former rather than the latter.


  2. Corey Smith

    Thanks for the article, and for providing a bit more clarity on and confidence about using Hard Money.

    For me, I see Hard/Private Money as the only way for me to get started. Of course it’s more expensive, but you just have to account for that when searching for deals.

    Once I have talked to a few local Hard Money lenders, and feel more comfortable with the process, I will likely be using Hard Money to fund my early deals … in the absence of being able to find Private Lenders, of course.

  3. Nick B.

    Hard money never made sense for me due to their high cost (a typical 12% rate + 3 points = 24% annual rate if a loan is held for 3 months, 48% if held for 1 month).

    However, I wonder if there are lenders that would use cash as collateral and lend 100% of that cash at a low rate of for a fixed small fee.

    For example:
    Property’s ARV is $120K, and purchase + rehab is $90K. I could pay cash and wait for 6 month to refinance 75% or the ARV which is $90K; or I would get a $90K “official” mortgage at 1% APR with a side agreement that a real collateral for the loan is $90K in cash. That way I could refinance the mortgage right after the rehab is done and get back my cash collateral as well. A lender would have no risk thus 1% rate seems to be reasonable.

    • Dave Van Horn

      Hi Nick,

      Thanks for reading.

      Hard Money certainly isn’t for everyone. It’s really asset based lending for investors who don’t have any other resources. But it can be a powerful tool when used correctly.

      To reiterate what I said in the comments above, rate isn’t everything. The investors I know who have built the largest portfolios to an extent, never really cared about the rate of their Hard Money. In fact, the investor I know who has probably one of the largest portfolios (Hundreds of properties) bought the first 39 with hard money. Sure the rate was higher but he didn’t care because he didn’t want to wait around. By using hard money he was able to buy the first 39 properties in under 2 years, with the HML’s eventually allowing him to buy multiple properties at a time. He eventually got to the rate of buying 5+ houses a month. So my point is, you don’t want to skip over dollars to pick up pennies. Besides, once he got to his 40th deal, he took out lines of credit on other properties he owned to purchase more and he’s since repeated this process, allowing him to never need to pay to use hard money ever again.

      When you think about it, rate is pretty much irrelevant when you refinance, get all your money back, and still cash-flow because at that point it’s an infinite rate of return. And if you can’t get your money back on the refi, the deal’s probably not worth doing.

      Plus the hard money rate is an expense, so it’s a write off anyway.


      • Nick B.


        Maybe HM makes sense if the volume is high enough to ignore the rates. In my market deals are slim and paying $5K to a lender reduces potential equity spread to almost nothing. I guess your friend was in a much different marker if he could find 5 deals a month that are profitable. I wish 2008 crisis came back now when I know how to benefit from it.


        • Dave Van Horn

          Hi Nick,

          You’re right, the market can be a factor. You might not be able to do something like this in the middle of Montana. My friend found a market that it could work in (keep in mind, you don’t have to limit yourself to your own local market, especially if it’s difficult to work in – I buy nationwide for that very reason). He and other investors I know like him also have a marketing machine they’ve built (including a team of birddogs) to find deals for them.

          And like I said above, once you have enough properties you no longer need the Hard money because you can get a Line of Credit to fund your deals. It’s really the velocity factor that Hard Money helps to accelerate, eventually freeing you from paying any fees to fund your investments. Plus if you were able to get a large enough Commercial Line of Credit, you yourself can become a Hard Money Lender. In my story above, the guy who funded my friend’s first 39 deals did precisely that.


    • Dave Van Horn

      Hi Mimi,

      Thanks for the kind words!

      The best way to start is to go to a REIA meeting. There you’ll not only find people who need private money, but you’ll also probably meet other private money lenders you can learn from. Really what you’re looking for is what their rules are and what their paperwork is like. Also in the beginning, I would recommend lending to someone who knows what they’re doing, rather than lending to a newbie.


  4. Jeb Brilliant

    Hi Dave,
    Good read and hard money is something I be been able to avoid up to this point but scares me bc I’ve been working on a cash out since March and the lender is just dragging their feet so if I was paying 13% it would be hurting.

    Question though, can you talk about the “making money” bit where you mentioned gaining $4k by coming in under budget? Don’t the lenders want to see receipts?


    • Dave Van Horn

      Hi Jeb,

      Thanks for chiming in!

      It’s true, if you borrowed the HML and the refi lender was slow you would feel the 13% fee. But there’s a loss of opportunity cost with your own capital to consider as well. Not to mention, you’re putting your own money at risk vs. somebody else’s.

      As far as your other question is concerned. It’s easier to do if you do some of the work yourself and/or have your own crew of handymen and laborers.

      If you’re borrowing Hard money, the matter of showing receipts would depend on the lender I suppose (it would probably be more likely of an issue if you’re new without a track record). If you’re borrowing private money, you probably wouldn’t be asked for receipts. Speaking as a Private Money Lender myself, I don’t care if my borrower comes in under budget, as long as the work is done.


    • Dave Van Horn


      If the property is worthwhile, as an RE investor it sure is! Because you potentially could be getting property at a fraction of the cost.

      The issue is, for Hard Money Lenders, the real money for them is in the points and churning the money as much as possible (a system that’s a lot more passive than taking back and managing/selling property).

      Thanks for reading.


      • johnie bridges on

        Hard money is the way to go I went from 0 to 20+ Single family properties in under 3 years huge cash flow the rate really doesn’t matter if you have the right exit strategy.

        • Dave Van Horn

          Thanks for commenting Johnie!

          And congrats! You seem to be the exception, but that’s exactly what I’m talking about!

          Keep it up.


  5. Cody Barrett

    What about for 8 plus units? Same situation if the numbers make sense? Or is private money a more popular option when it comes to larger multi unit deals? SFH makes a lot of sense because of the refi option on the ARV to get the HM lender paid off and the cashflow increased. I guess similar could be said if one finds value adds and below market rents on apartment complexes and gets a solid purchase price based on actual NOI.

    Also, would REIA’s and meet ups be the best locations to meet potential lenders, private or HM?
    Thank you sir!
    Cody B

    • Dave Van Horn

      Hi Cody,

      Commercial deals (i.e.anything over 4 units) are generally easier to obtain permanent financing. Although the bank will most likely make you personally sign, that type of financing isn’t based on the borrower as much as it is the property. And the appraisals with commercial property are based on NOI, more-so than local comps (like with residential), so it’s easier to refi out.

      Plus with larger commercial pieces, the bank allows more creative financing (like the seller carrying a 2nd mortgage for example) to purchase.

      And yes, I would definitely say REIA’s are a great location to meet potential lenders! I would also check out the Bigger Pockets forums as well.


  6. Charles Morgan

    I am using hard money to purchase my rentals. As long as it will cash flow I am happy with it. I have a great relationship with my lender to the point where the last two loans were no points and one was 100% financing.
    When I needed a quick loan for one property he found me another lender (he was temporarily tapped out) and even arranged the loan for me!
    He even saved me a ton of money on insurance rates by catching a big bump in my rates a couple of years ago, I changed companies at his recommendation.

  7. Justin Pounds

    This is a great post. I am new to the real estate investing world but I have been reading books and blogs about the numerous strategies to get started. Thank you everyone for your post and Dave for this wonderful article. Looking foward to learning more and taking action. Oh yeah Dave, do you have a couple of pointers for a new investors approach to get a HML or private lender? Thank you.

  8. Aaron Howell

    Excellent post Dave ! I’ve reached the point where I’m looking into HMLs. I hate the loan process at this point with banks. I have 7 units and the banks rake me over the coals each time I add a unit. The Hard Money Lender I’m currently working with seems so laid back.

    How hard is it down the road to refi out of a HML ? I imagine the better price at initial purchase makes it easier when refinancing and maybe having some cash on hand to add to equity if the refi bank needs it but what else am I missing ? I’m currently looking at a triplex that’s been on the market for a while.

    • Dave Van Horn

      Thanks Aaron!

      I guess the answer really depends. I can’t give a blanket answer and say it’s always easy. It depends on the exit loan you have, how you took title, what your credit is like as a borrower, etc.

      Your best best is to find out about the terms of the refi before you do the deal. There are actually companies that may give you the terms ahead of time if you ask. Although I haven’t used them myself, I’ve had borrowers of mind tell me companies like B2R Finance (http://www.b2rfinance.com/) will fill them in on the details of the refi in advance and it has helped them decide whether or not to do a deal.

      Hope this helps.


  9. Allen Fletcher

    I have been looking into a number of different hard money lenders, do you have any tips for pointing out the shady ones from those that are really seeking to help you? It seems that there are a lot of both out there in the market.

    Allen Fletcher

  10. I’ve been classified as a hard money lender since 2000. I haven’t lost any money, regardless of which way the market goes. Wall Street investors can’t say that. An investor and I looked at a property on sept 28 and I funded a loan for $350,000 on oct 6. The purchase price was $182,500. The rest I held in my escrow for repairs to the vacant restaurant building. 12 months of payments and taxes for 2017 were included in the escrow holdback. He has an offer for $700000 but turned it down since he had the extra pmts in escrow. He wants a $1,000,000.
    He understands the power of hard money.

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