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

Mike LaCava
7 min read
8 Things Real Estate Experts Won’t Tell You About Hard Money

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, being fearful, not knowing what steps to take and wondering where to start also prevent people from flipping houses (all legit reasons by the way).

But the “I have no money” sentiment is the No. 1 reason people don’t get started flipping houses. Would you be so scared if you knew about hard money loans?

Enter Hard Money…

There are many ways to flip houses without using 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.

That’s not true at all though.

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

Related: The Ultimate Guide to Flipping a Property with No Money

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 lenders are 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 started as merely business associates, but now consider them dear friends.

So I’m here to dispel those myths and call out hard money lenders 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.


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8 Things the Experts Won’t Tell You about Hard Money

1. Hard Money Is a Legitimate Business

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

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—at least to some degree—because they in essence do what banks do, which is lend money.

There is nothing scary about hard money but misperceptions of the “legitimacy” of these businesses still exist. I think some would-be house flippers think hard money is money borrowed over the black market or something.

If you think this way, then I’m glad you’re reading this, 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 strategies for investing. 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, eliminating much of 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 think I 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, they secure their 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 refers to it as “hard money.”

hard money-loan

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 I’m proof you can definitely make good money on house flips from hard money.

With hard money, you could be looking at rates of 12-18 percent along with two to six points. Pretty high rates, no doubt—but you can still make money even with those costs.

To be sure, you should exercise caution when using hard money. You want to be able to look at your numbers when going into a property and analyze them carefully, knowing full well your cost on borrowing that money.

If you know your numbers cold and factor in your financing costs 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 percent with three points, you’ll want to calculate that in a deal analyzer and run the numbers 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 percent and all your other costs. These holding costs include utilities and 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.

businesswoman doing paperwork at office desk, working through finances, using calculator and making notes in her notebook with pen

5. Hard Money Rates Are High, But Here’s Why

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 or should have.

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

Remember: no risk, no reward.

6. Legitimate Businesses Do Business With Hard Money Lenders

There are many reasons why people can’t do business with banks. 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 means is that with the strict guidelines, it’s harder for banks to lend money out—even if they feel good about lending 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 businesses use hard money loans just like us real estate investors.

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

7. Hard Money Lenders Typically Won’t Finance 100 Percent of the Loan—But That’s OK

There’s a concept called “skin in the game.” Have you heard of it?

What it 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 it 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 money 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.

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

And even if you don’t, all is not lost.

It just simply means you will have to work a little harder than someone who 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 a thousand or tens of thousands of dollars and looking for multiple hundreds of thousands of dollars (depending on your market).

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

Have experience with hard money lending or flipping houses with no money? 

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.