Mortgages & Creative Financing

The Pros and Cons of Becoming a Hard Money Lender

20 Articles Written

When most people think of real estate investing, they tend to think of direct investing: buying property to fix and flip or hold for long-term rentals. While these are the most popular ways of participating in the real estate investment market, there are other options.

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If direct investment isn't for you or if you are already an investor but want to add some diversity and expand your reach, one option is to look at getting in on the other side of the real estate investment equation—as a hard money lender.

Overview of Hard Money Lending

In case you are new to this term, a hard money lender, also known as private money lender, is a non-institutional (non-bank) individual or company that provides ­loans to real estate investors (borrowers) for the purchase or construction of properties.

The term "hard money" is used because the lender focuses more on "hard" assets (the real estate) when evaluating a deal versus the borrower's ability to pay as indicated by income or credit score. The loan is generally secured by a note and deed of trust.

Person sitting at a desk signing paperwork with guidance from another person who is pointing at a line item

What Is a Hard Money Loan

Loans available from a hard money lender are known as hard money loans, private money loans, rehab loans, or bridge loans. The borrower's objective is usually to purchase and then ­fix and flip or, in the case of new construction, build the property and sell. In both cases, time is critical.

Borrowers want to complete the project as quickly as possible, so they can repay the loan and turn their project into pro­fit. There are many varieties when it comes to hard money loans, but most have the following characteristics:

  • Usually short term (6 to 12 months)
  • Commonly used for fix and flips but can also be used to build new properties or purchase and hold
  • Most often used for residential properties but can also be used for commercial real estate

Related: The Ultimate Guide to Hard Money Loans

Considering Becoming a Hard Money Lender?

Here are a few pros and cons to consider:


  • You can expect a relatively high return on your investment as compared to bank investments or bonds.
  • The actual work of rehabbing and building is someone else’s problem. Some people are better suited to be financial managers/lenders than they are to do the actual work on the property.
  • There is a margin of safety as hard money lenders typically lend 65% to 70% LTV (but see point below about less risk equating to less reward).
  • Hard money lending is relatively secure since you can hold the borrower's assets as collateral. If the borrower defaults, you can move in to secure the collateral through foreclosure.


  • Becoming a hard money lender requires a lot of capital. You actually have to have money to lend. And you need to make sure that you can cover the expenses required in case the borrower defaults and you need to go to court to recover your cash. (IRA money can actually be used for this purpose, but to make this work, you must set up a self-directed IRA.)
  • While returns can be attractive, lending money for a project will typically result in a lower return than if you were to take on the project yourself. In exchange for taking less risk, lenders are limited to making money on the interest. If a project is super profitable, all of the upside goes to the borrower who took the equity risk.
  • Hard money lending lacks standardization (this is both a pro and a con). There are fewer requirements, less paperwork, and limited red tape. But with a lack of standardization comes a real risk of borrower default.
  • Federal regulators, including the Consumer Financial Protection Bureau, routinely update the rules in ways that could affect hard money lending. It is important to be aware of and stay on top of federal and state regulations.
  • There may be additional licensing requirements depending on the state in which you will lend.

Related: Understanding the Benefits and Risks of Hard Money


Just like any venture, becoming a hard money lender has its pros and cons. Before jumping in to the business of hard money lending, it is important to do your homework. Make sure you have clearly defined goals and objectives, know your strengths, and identify where you’ll need help.

In my case, it made sense to expand my real estate investment business by adding hard money lending to the equation. I had the industry knowledge to evaluate the deals, could assess properties well, and knew when to walk away.

I also had a network established, a way to raise the capital, and a business objective to expand without being hands on. Review your objectives and strengths to make sure it is the right option for you.


Have you considered getting into hard money lending? Do you have any questions for me? 

Ask away in the comment section!


Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to ...
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    Chris Holm
    Replied about 1 year ago
    I am an investor and know someone who I trust who like to become a private lender. I would like to give her that opportunity and use her for my next hard money loan. Are there standard forms that I can access someplace? I have 5 rentals and just sold a 31 unit apartment complex. I have always used mortgage brokers and banks. thanks so much. Chris
    M. Ian Colville Lender from Minneapolis, MN
    Replied about 1 year ago
    Lending laws differ by state so it is difficult for me to refer you to a general source as it would almost certainly miss some of the nuances for your state. If she is going to make a business out of this (vs just doing a 1-off loan) I have the following recommendations: Option 1 – Pay a lawyer who specializes in lending to create template loan docs that are compliant for your state that she can reuse on multiple deals. Option 2 – Find a “CUSO” (credit union service organization) in your state and see if they will work with private lenders and have them generate loan docs on a deal by deal basis. Some CUSOs have expanded to provide services to organizations other than credit unions. We use a CUSO here in Minnesota to generate all of our loan docs.
    Aaron Barber Rental Property Investor from Las Cruces, NM
    Replied 4 months ago
    How much money does one need in order to be a hard money lender. Do hard money lenders get their money from smaller investors or from banks? Thanks
    M. Ian Colville Lender from Minneapolis, MN
    Replied 4 months ago
    Hi. Thanks for your question. There is no minimum amount of money to be a lender, but obviously, you need enough money to actually make a loan. The more money you have, the more diversified you can be (have more loans so that if one goes bad, you still have others that are doing well). You might want to check the lending regulations of your state, however. In Minnesota, for example, any loan under $100k is considered a "consumer" loan and is subject to additional regulation so we don't make any loans under $100k Hard money lenders can get their money from wherever they want. In our case, you are correct that we get money both from investors and from bank lines of credit. I know of some lenders who use personal funds, including funds from their retirement accounts via self-directed IRAs.
    Ryan Smith
    Replied about 1 month ago
    Thank you so much for taking time to write this article Ian! I have done 3 hard money loans this year and found it to be a good option for me so far. The funds run out quickly using personal money. Can you comment on what it takes to obtain a bank line of credit to do more hard money deals? My contacts in the banking industry say that I would be hard pressed to find a lender with the appetite for this type of loan.
    M. Ian Colville Lender from Minneapolis, MN
    Replied about 1 month ago
    Hi Ryan. We have 5 lines of credit at the moment totalling $20mn from local banks so it is definitely possible. Generally it takes scale to get banks interested. 3 loans per year probably isn't enough. My recommendation is that you raise money from outside investors (not banks) first to fund your loans and then approach banks once your business is larger.