Mortgages & Creative Financing

I Used a Hard Money Loan to Invest—Here’s What Happened

Expertise: Landlording & Rental Properties, Real Estate Investing Basics
19 Articles Written
man against gray brick background looking down into empty wallet

Cash flow woes? Me, too! I have never been someone flush with cash. My bank account has never gotten to six digits. I do not “make it rain.”

In my defense, during my younger years, I was busy blowing money on cars. Now in my late 20s and early 30s, I choose to invest much of the liquidity that I have. Point is, if you are struggling to come up with down payment money and other upfront costs, you are most certainly not alone.

My first two properties were kind of "easy." I bought them as an owner-occupant and was not heavily governed as to what down payment percentage I needed to give them. Yes, there were minimum amounts, but I was not required to put down 20 to 25 percent like you may need to as an investor seeking a loan from a conventional bank. Rather, as long as I fit into the debt-to-income parameters of the bank, I was OK.

The first property I bought was done with FHA financing at 3.5 percent down. The next one was done via a conventional mortgage with only a 10 percent down payment, because that still allowed me to be under the debt-to-income thresholds.

However, buying a real non-owner occupied property as an investment was a different story.

Everyone wanted 25 percent down! I don't know about you, but in my area, a decent property starts at $150,000. And even one like that is probably going to need some repairs. So, 25 percent of $150,000 is $37,500. That is a lot of money and doesn't even account for lender fees, appraisal, inspection, or repairs!

business colleagues meeting in boardroom going over paperwork

How to Invest When You Can’t Afford a Down Payment

I did not have that kind of money—not even close. I needed some way of getting in for less. This is when I discovered hard money loans.

I know what some of you are thinking. I meant to say "loan shark." But listen, everyone in this industry has their place—from the real estate agents to the underwriters to the hard money lenders.

For me, hard money was there when I had a deal I knew was great, but I didn't have the cash to purchase it or fund the repairs. My first hard money deal was structured as 15 percent of purchase and 100 percent of rehab, as long as the total loan was less than 75 percent of the after repair value (ARV).

Whoa. Slow my roll a bit, right? OK, let’s unpack that.

This means I need a down payment of 15 percent (instead of 20 to 25 percent), and they were going to give me all the money for rehab (more on the rehab part below). But like I mentioned, my loan needed to come in below a certain ARV.

Example: Hard Money Loan by the Numbers

Let me give you a real-life example.

  • Purchase: $123,000
  • Down payment: $18,450
  • Rehab budget: $55,000
  • Total loan amount: $159,550 ($123,000 – $18,450 + $55,000)
  • After repair value: $255,000 (per appraisal)
  • 75% of ARV: $191,250

Is my total loan amount less than 75% of the ARV amount? Yes.

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Does this deal work for a hard money lender? Yes.

Since we are talking about having or not having enough money to make the plunge, was $18,450 just pocket change at the time? Heck no! It was a lot.

However, if I had done a conventional loan at 25 percent down on the $123,000 purchase price, I would have written a check for $30,750. That’s a $12,300 difference.

Related: The Ultimate Guide to Hard Money Loans

How a Hard Money Loan Works

Don't forget, with this hard money loan, they were paying for 100 percent of the rehab, too.

Let me be clear though. They (at least for me) did not write me a check for the $55,000 that I indicated was the rehab budget for the property. Not even close to that.

Instead, everything was done on draws. Did I know that going into it? Not really. Do I really wish I understood that better? Yes.

Let me explain why.

The rehab aspect of the loan could potentially have a major impact on your wallet. Yes, they will pay for repairs, but there is a process.

My process went something like this:

  1. Contractor and I agree on budget.
  2. Contractor and I agree on timeline.
  3. Contractor starts job No. 1 of project.
  4. I pay contractor funds to get rolling (cost of materials).
  5. Contractor finishes job No. 1.
  6. Third-party inspector comes out to sign off on completed work.
  7. Third party inspector submits his findings to lender.
  8. Lender issues you a payment (draw) for whatever job(s) have been completed.
  9. Lender may issue you partial payments if inspector found job(s) to be only partially completed.

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

Key Takeaways From the Hard Money Loan Process

For me, I needed to front the money (or at least part of it) for each job on the rehab outline. That means, aside from any down payment money, lender fees, and points, I still needed to have some reserves to get the job done.

This is massive. This is monumental. I think it is of the utmost importance that this be explained and understood well, before you take the proverbial plunge. The last thing you want is to make the purchase and then run out of money in the rehab phase.

Please use caution. This particular fact has been discussed at length, but it is still worth mentioning: Do not give your contractor all of the money up front.

Many argue that no money should be exchanged before the job is completed and the draw is issued. This is for you to decide based on your relationship with the contractor, the level of trust you have, and, I suppose, how much cash you are willing to risk.

This is not an article about “no money down.” This article addresses the fact that you are not alone when it comes to issues surrounding cash reserves, saving up, and down payments.

Yes, there are ways to do no money down and even low money down (think seller financing). However, my experience with a hard money lender was a great one.

This strategy checked all the boxes for this particular deal. I needed to get into the property with a lower down payment, and I needed someone to fund the rehab. Yes, there were points, and yes, the interest rate was comparatively high (9.9 percent). But at the end of the day, I got the property, rehabbed it, and rented it. Mission accomplished.

Sometimes you just have to take a calculated risk and not look back.


Are you considering a hard money loan? Do you have any additional questions I can answer?

Ask me in the comment section below. 

Ryan Deasy, of Deasy Property Group and RentReddy, is a long-distance landlord currently residing in Houston, T...
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    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 year ago
    I've taken out and done some hard money lending over the years. For Equity Purchases (Flips) I have used money partners who shared the profits with me. And I have bought some deals in the "fix-up" stages from people who got in over their heads. Hard money on both sides is good IF you know what you are doing. It's all in the numbers. Most beginners don't understand how these deals work and they don't have the margins they need to make a profit. If the equity is there and you can move fast enough, hard money is a viable choice. A friend of mine just closed a deal with the guy who did the front-line work. The deal went on so long that a bunch of the profits came out as my friend's interest fees on his hard money investment. The front-line guy howled a lot, but it took about 9 or 10 months from start to finish. Know what you're agreeing to up-front so you don't cry hard at the end.
    Matthew Lahickey
    Replied about 1 year ago
    Hey Ryan, I recognize you from Big Sky. I am in CT and have been researching heavily before I jump in and get my feet wet. I think your article today was a message from above as I have been analyzing the hard money loans trying to figure costs, structure, and payments. All the articles I've read and companies I look into give the same info without any of the meat and potatoes. If you can describe all of the costs associated with the deal that would be great. I am trying to figure the correct buy price working backward from the ARV with all the fee's, points and interest correctly calculated. I am looking in New Britain and am in a similar position as you stated in the article. I am looking around 20-25k down payment without having to find some private help. Also what lender did you go with and who else did you look into? My ultimate goal is to start with a hard money loan on a cheaper BRRRR and work my way to owning 5+ multifamilies along with some college rentals around CCSU and Quinnipiac. I would like to eventually live off my rentals for long term cash flow and leave corporate America behind. Thanks in advance. Matt.
    Todd Campbell Investor from Austell, Georgia
    Replied about 1 year ago
    Wow! Well done and well read article! Very clear and articulate. Thank you for sharing! It makes a lot of sense to me. But if you don't mind sharing, how did you come up with the roughly $20K for down payment and initial draw money?
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Todd, thanks for reading! I have a pretty good 9-5 job. I am able to save a bit from it. That money was really just savings from my job.
    Dave VanDommelen Lender from Simpsonville, SC
    Replied about 1 year ago
    Great article! Similar to the process for new construction, I always recommend people use the AIA G702 and G703 Payment Application and Continuation sheets for renovation projects. Even if its a modified version where an architect or engineer isn't involved. Helps keep things on track and lets you, your contractor, and lender know where you are in the process.
    Bailey Sessoms
    Replied about 1 year ago
    Thanks for the article! I'm a newbie and I've only been a landlord. I haven't purchased a rental property before. (OK, I just realized how that sounds, but it's true.) This gives me some insight on what to consider percentage wise if I decide to go the hard money route.
    Diane Perry
    Replied about 1 year ago
    This article does not mirror my experience at all. I contacted, and was contacted by many supposed hard money lenders, and the terms were so awful I gave up. Many wanted a lot of points (essentially prepaid interest) on top of already much too high interest rates. I have very good credit and was looking for money out of an already rented sfh property that I own outright so cash flow is excellent. A lot of them seemed like scams, asinor cas p ront an e r qestion they ask is what’s my social security number. Very disappointed. Even the lender who was recommended to me from BP wanted too much for the money.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Diane, thanks for sharing. If you own a rental property outright and you want to take money out of it, you need to be looking at lines of credit not hard money. Hard money is not what you want for this situation at all.
    Zoe Robinson
    Replied about 1 year ago
    Diane, since you own the property outright, wouldn't it be easier to do a HELOC to find your next deal? Still learning the ropes. Any insight is appreciated
    Diane Perry
    Replied about 1 year ago
    I meant to type, “ A lot of them seemed like scams, the first question they asked was “what’s my social security number.””
    Joseph Gonzales Rental Property Investor from Midland, TX
    Replied about 1 year ago
    Hey Ryan, Great article. I'm new to investing and wholesaling, so a glimpse into the hard money process helps a lot. I was curious if you have any experience with using hard money for wholesale type deals, e.g. find a great deal, get hard money to acquire the property, sell the property to a buyer, repay the hard money loan. Again, I'm a newbie, any words of wisdom, advise, or pitfalls you have experienced will help me grow!
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Joseph, i do not do wholesaling but i do think it is pretty awesome. with wholesaling you are selling the contract that you have. there should be no reason to purchase the property at all. that would essentially be flipping.
    Arya Jackson from San Francisco, Bay Area
    Replied about 1 year ago
    Eyeopening, thanks for sharing!
    Phil Hucke
    Replied about 1 year ago
    I'm a newbie making it up and learning as I go. I had a good deal on a property and closed on it, which used most of my cash reserves. I still needed rehab funds and I tried 2 different hard money lenders and they both came back with a no; they wouldn't loan on a property they didn't provide i.e. they offer loans including rehab money, but only on properties they already had under contract or owned. Essentially, you had to buy it from them. I ended up getting a personal loan from my own bank for way better terms. I may look at hard money for my next one but it wasn't there on this one.
    Rick Perez
    Replied 8 months ago
    Thanks for that information Phil, I was actually thinking about doing the same purchase with my own funds and hard money for the rehad thanks you for sharing you experience I will be more careful before buying now.
    Erin Murphy from Portland, ME
    Replied about 1 year ago
    Hello Ryan, great article. I do not quite understand how you are able to use hard money lending for a rental. I thought that way of financing is appropriate for flips as you will be paying the higher interest loan off in a year. Did you refinance? Thanks in advance.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Erin, hard money is great for both rentals and flipping. mostly, you see the use of hard money when there is rehab to be done on a rental property as normally they provide a large amount, if not 100%, of the budgeted rehab. let me know if you have other questions!
    Nicholas Koger New to Real Estate from Indianapolis
    Replied 3 months ago
    So I’m just getting into owning rentals. I need the whole purchase + rehab financed. I’m planning to do a BRRRR, if I think I’m going to buy should I meet up with the contractor and have it in writing to show the hard money lender?
    Everest Jordan Rental Property Investor from MD, 20878
    Replied about 1 year ago
    In order to payoff the hard money lender you will need to get a mortgage or note on the property from another source. This way you pay off the hard money lender and their higher points by another with much lower interest. Usually, since the hard money is a cash transaction, the house is paid for, and you simply need to get a conventional retail lender for a refinance. This way you can draw out 75 % of ARV, which in this example is around 191k (75% of 255,000). So Ryan spent $18,450 and pocketed $191k for this next venture.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    H Everest, that is pretty close. however, when i refinanced i picked up a new long term bank loan for 160k. thus, the math is really 191-160 at the end of the transaction.
    Will C. Rental Property Investor from Richmond, Virginia
    Replied about 1 year ago
    Thanks for the article Ryan. Great read!
    Daniel Peavey from Atlanta, GA
    Replied about 1 year ago
    Legal!! Do you and hard money lender go to a attorney? How does it work legally?? Does hard money lender hold a promissory note, with property as collateral, in case of delinquency of payment?? What were terms?? 1 year, 2 year?? What would legal costs be if you defaulted on loan?
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Daniel, yes i use my attorney for all transaction. hard money is much like buying a house the regular way with less rules, less combing through your personal finances and shorter terms. normally, the term is 12 months which is what i had.
    Rose Maduro Real Estate Agent from Atlanta
    Replied about 1 year ago
    Very encouraging read...I love how the process was explained so I understand. How did you come up with the DP?
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Rose, nothing special here with the downpayment. i honestly just saved it up. i have a decent 9-5 job. i know that's not too exciting!
    Jeffrey Bower
    Replied about 1 year ago
    >This article does not mirror my experience at all. I contacted, and was contacted by many supposed hard money lenders, and the terms were so awful I gave up. The term 'hard money lender' scares me off, too.
    Revekah Cosby from Delaware/Maryland/New Jersey/Virginia/Pennsylvania
    Replied about 1 year ago
    Keep trying. I found one that only requires 10% downpayment. Will pay 100% of rehab costs. Goodluck.
    Jarrod Vosburg
    Replied 7 months ago
    What is the name of the one that you found if you don’t mind me asking? Thank you
    Leigh Sietsema New to Real Estate from Asheville, NC
    Replied about 1 year ago
    Thank you for this great article. I am a visual learner, so reading exactly what happened, and in what order, is very helpful. Thank you for your time in sharing your experience. I can't wait to jump in.
    Nick Peraino Rental Property Investor from Pensacola, FL
    Replied about 1 year ago
    Thanks for the article! How did you refinance all the hard money out of the deal? That's a very important step in using hard money. If you don't mind sharing... what long term lender did you use and how did that part work out?
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Nick, i found a small local lender in the area i invest in. they had good terms and wanted to work with me. we did an appraisal, i got 75% of that value as a loan amount which was enough for me to pay off the hard money lender and also pocket some cash too. happy to explain in more detail if needed. send me a message if you want. thanks!
    Jessica Richmond
    Replied 3 months ago
    Hi Ryan, How long did you have the hard money loan before refinancing? I'm looking into a hard money loan for my first investment property as a buy and hold without a rehab. I'm wondering if this is wise. In your example of finding a small local lender to refinance, it appears that your property had to increase in value significantly (via your rehab) in order for the 75% appraisal value to completely pay off the hard money lender and make some extra cash. If I purchase a rental ready or turnkey property without doing a rehab it seems unlikely my property will increase in value enough to pay off the hard money loan quickly. Do you have any recommendations or do I need to strongly consider BRRRR? Thanks!
    Katie Rogers from Santa Barbara, California
    Replied about 1 year ago
    "However, if I had done a conventional loan at 25 percent down on the $123,000 purchase price, I would have written a check for $30,750. That’s a $12,300 difference." On the other, with a conventional loan that extra $12,300 purchases equity. With a hard money lender you may end up paying much of that $12,300 as interest as implied in an earlier comment.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Hi Katie, assuming your statement is true, which it may be, i just simply did not have that much cash to put down. in essence, i suppose i paid that extra 12.3k out over time during the course of the hard money loan which i was happy to do because it afforded me the deal. if i had a few hundred thousand to spend for example, i would not be paying anyone anywhere close to 10% for anything.
    Alvaro Soto Rental Property Investor from Jacksonville, North Carolina
    Replied about 1 year ago
    Hey Ryan, thank you for sharing your deal. Hard money does have a bad reputation due to those horror stories you have all heard. But as long the number make sense I know it can work. I personally never done a big rehab and I try to avoid them due to lack of experience. I don't want to speculate on the ARV of a home and come short. What do you recommend me to do? Also, I notice you said you rented the house, can you let us know the Cash on cash ROI, I'm curious to know the return using hard money lending. Thank you.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Alvaro, thanks for commenting. i recommend you know your arv numbers cold, and build in a buffer. for example, i knew i could get 75% of the arv but was doing all calculations based on 70%, although 65% might be a better recommendation. i can tell you, the appraisal will probably come in lower than you expect. so, be sure to build in a buffer. as far as returns, i basically pulled all of my money back out via the cash out refinance minus interest that i had paid over the course of 1 year at 10%. the property does about $4800 gross per month, mortgage is $1861, and then i account for 50% in expenses. happy to help further. please send me a message if you would like.
    Rahul Deshpande from San Jose, California
    Replied about 1 year ago
    Thanks for the insightful article. Is there a deterministic way to determine the ARV before going into a deal ? What if house was appraised much lesser than what you paid for ?
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Rahul, with residential properties, it is just about comps. you should be able to look in your area at properties that are similar to yours as far as size, bedroom and bath count etc as well as the condition of the property and determine what you think yours will appraise for after renovations. you could even have a realtor pull comps. you should also build in a buffer. i knew i was going to get 75% of arv but i was working with 70% in all of my calculations. if property came in less than you expected you can argue the appraisal and try to raise the valuation. i have written a 6 page response to an appraisal before. one time it worked and they raised it the 5k that i wanted. i know, not a ton of money but it was worth it. if that does not work, you would need to bring extra money to the closing table to fill that gap.
    Ryan Deasy Rental Property Investor from New Britain, CT
    Replied about 1 year ago
    Thank you so much everyone for all of the feedback and comments. It means a lot! Feel free to message if you have any more questions.
    Sean Senatore Lender from Staten Island, NY
    Replied about 1 year ago
    Great article. Your NOI is only $539? Is my math correct? $4800 / 2 = $2400 minus mortgage payment $1861= $539. That is 1/8th of the GRI?? Usually a "good" NOI deal is 1/4 of the GRI. Please explain. Is there HOA expenses are something I missed? Thanks
    Vinh Le
    Replied 12 months ago
    Do you mind refer the hard money lender that you used?
    Steve Kirsch from Hilo, HI
    Replied 11 months ago
    Yes, great article and good in depth info. I'm sure there is still plenty to discuss that was left out. Question: Have you done any deals with Private Money instead of Hard? If so, how was that loan structured? Similarly or different? thanks Steve K
    Stuart Fluitt
    Replied 8 months ago
    Since you rented and not flipped. How does the hard lender get their money back? Sorry for the dumb question just starting and figuring out all the ins and outs.
    Mike Cavallo from Wallingford, Connecticut
    Replied 18 days ago
    He refinanced through a bank at something like 70 to 80% ARV.
    Slaiman Atayee from Washington, D.C.
    Replied 5 months ago
    Awesome deal! I was wondering what you total project cost came out to be, including hard money/rehab/refinance fees? Your 75% LTV was the $191k so i'm assuming total costs were less than that?
    Julie Bradley from Taunton, Massachusetts
    Replied 3 months ago
    Hell there, Great article. Quick question......Did you remain in the hml after you got it rented or did you refinance out of the hml? If you're still in the hml how do you make the numbers work with the cost of hml's?