Hard Money vs. Conventional Financing
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Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 300 posts · 112 votes
1wQuote from @Siahna Im:
There's no “best” financing option for every investor.
Conventional financing may work well for long-term holds, while private financing can make sense for projects where speed, flexibility, or renovations are important.
The key is to consider financing before you make the offer.
What financing strategy has worked best for your investment goals?
@Siahna Im, I agree that the financing should be part of the plan before the offer goes in. One thing I’ve learned from working with investors is that the interest rate is only one part of the decision. I also look closely at the term, monthly payment, balloon date, extension options, prepayment rules, personal guarantees, and what happens if the rehab or sale takes longer than expected.
I’ve seen good properties become stressful deals because the financing did not match the actual exit plan. If someone expects to renovate and sell in six months, that is a very different loan decision from someone planning to hold the property for years. For me, the best financing is the one that still gives the investor enough room if the original timeline changes. I like the way you look at financing based on the actual goal of the deal, and I’d be glad to stay connected and keep up with what you’re seeing on the lending side.
8 Replies
- Attorney · 10451 Mill Run Cir #755 Owings Mills, MD 21117 · Member since 2024 · 300 posts · 112 votes1w
Quote from @Siahna Im:
There's no “best” financing option for every investor.
Conventional financing may work well for long-term holds, while private financing can make sense for projects where speed, flexibility, or renovations are important.
The key is to consider financing before you make the offer.
What financing strategy has worked best for your investment goals?
@Siahna Im, I agree that the financing should be part of the plan before the offer goes in. One thing I’ve learned from working with investors is that the interest rate is only one part of the decision. I also look closely at the term, monthly payment, balloon date, extension options, prepayment rules, personal guarantees, and what happens if the rehab or sale takes longer than expected.
I’ve seen good properties become stressful deals because the financing did not match the actual exit plan. If someone expects to renovate and sell in six months, that is a very different loan decision from someone planning to hold the property for years. For me, the best financing is the one that still gives the investor enough room if the original timeline changes. I like the way you look at financing based on the actual goal of the deal, and I’d be glad to stay connected and keep up with what you’re seeing on the lending side.
- Lender · Lakewood, WA · Member since 2021 · 48 posts · 24 votes1w
Quote from @Diana Khan:
Quote from @Siahna Im:
There's no “best” financing option for every investor.
Conventional financing may work well for long-term holds, while private financing can make sense for projects where speed, flexibility, or renovations are important.
The key is to consider financing before you make the offer.
What financing strategy has worked best for your investment goals?
@Siahna Im, I agree that the financing should be part of the plan before the offer goes in. One thing I’ve learned from working with investors is that the interest rate is only one part of the decision. I also look closely at the term, monthly payment, balloon date, extension options, prepayment rules, personal guarantees, and what happens if the rehab or sale takes longer than expected.
I’ve seen good properties become stressful deals because the financing did not match the actual exit plan. If someone expects to renovate and sell in six months, that is a very different loan decision from someone planning to hold the property for years. For me, the best financing is the one that still gives the investor enough room if the original timeline changes. I like the way you look at financing based on the actual goal of the deal, and I’d be glad to stay connected and keep up with what you’re seeing on the lending side.
Absolutely agree. Financing needs to fit the entire deal strategy, not just look good on the interest rate. The term, exit plan, flexibility, and what happens if the timeline shifts can make a big difference. Appreciate you sharing this perspective!
Pacific Equity & Loan.4.684 Reviews
- 1wBrent ConradBusiness MemberLender · Mckinney, TX · Member since 2017 · 18 posts · 2 votes
I agree. Financing should be part of the deal analysis before the offer is ever made.
As a direct hard money lender, I see investors get into trouble when they get a property under contract first and figure out the financing second.
For me, the biggest factors are:
- Purchase price and true basis
- Current value and ARV
- Rehab scope and budget
- Exit strategy
- Timeline
- How much cash the borrower has in the deal
- Whether there is enough margin if the project doesn't go exactly as planned
Hard money isn't the cheapest capital, and it shouldn't be used just because it's available. Where it makes sense is when speed, flexibility, or the condition of the property makes conventional financing difficult.
A good deal with the wrong financing can become a bad deal pretty quickly.
CR LENDING LLC4.715 Reviews- Lender · Lakewood, WA · Member since 2021 · 48 posts · 24 votes1wAbsolutely. I agree that financing should be evaluated alongside the deal numbers, not after. Looking at the basis, rehab, exit strategy, timeline, and available cash upfront makes it much easier to determine whether the financing actually supports the deal. The “cheapest” option isn’t always the best option if it doesn’t fit the project.
Quote from @Brent Conrad:
I agree. Financing should be part of the deal analysis before the offer is ever made.
As a direct hard money lender, I see investors get into trouble when they get a property under contract first and figure out the financing second.
For me, the biggest factors are:
- Purchase price and true basis
- Current value and ARV
- Rehab scope and budget
- Exit strategy
- Timeline
- How much cash the borrower has in the deal
- Whether there is enough margin if the project doesn't go exactly as planned
Hard money isn't the cheapest capital, and it shouldn't be used just because it's available. Where it makes sense is when speed, flexibility, or the condition of the property makes conventional financing difficult.
A good deal with the wrong financing can become a bad deal pretty quickly.
Pacific Equity & Loan.4.684 Reviews
- Lender · Tampa, FL · Member since 2013 · 2k+ posts · 2k+ votes1w
I totally agree. Here's how I usually explain it. It's really a math issue. Private Money and DSCR loans don't really look at "global cash flow", meaning comparing all of your income and all of your expenses...even those unrelated to the transaction...where Conventional (Fannie/Freddie) financing does. Conventional financing is usually a bit cheaper for long term financing, but it's hard to scale after a property or two because of how Fannie calculates that global cash flow. Fannie says that your DTI, meaning your Monthly Expenses/Monthly Income, must be equal to or less than 43% (really 50% in practice). So lets use ridiculous numbers to make the math easy for an illustration. Let's say you make $1000 per month. That means that your mortgage, taxes, insurance, credit card minimum payments, student loans, car payments, etc can be no more than $430/mo to keep it to 43% or less (yes..I know in practice it's really about 50%...but that's what guideline says). Now, let's say you find a rental that brings in $1000/mo, but your new PITI+HOA mortgage payment is only $800. That means that you positively cash flow +$200 month...you're better off, right? Not how Fannie figures it. Your 43% jumps when you now have income of $1000 + your new rent of $1000...a total of $2000/mo. Your expenses go from $430 and add an additional $800/mo for a total of $1230/mo. New DTI = $1230/$2000 = 61.5%. You no longer qualify. It's really a trick of math. As you add rentals, it becomes harder and harder to qualify conventionally. Yes, I know those numbers are silly, but you get the point. DSCR and Private Lending/Hard Money/Bridge Lending usually ignore the global cash flow that Conventional financing requires. That's how I usually explain it.
- Lender · Lakewood, WA · Member since 2021 · 48 posts · 24 votes1w
Quote from @Doug Smith:
I totally agree. Here's how I usually explain it. It's really a math issue. Private Money and DSCR loans don't really look at "global cash flow", meaning comparing all of your income and all of your expenses...even those unrelated to the transaction...where Conventional (Fannie/Freddie) financing does. Conventional financing is usually a bit cheaper for long term financing, but it's hard to scale after a property or two because of how Fannie calculates that global cash flow. Fannie says that your DTI, meaning your Monthly Expenses/Monthly Income, must be equal to or less than 43% (really 50% in practice). So lets use ridiculous numbers to make the math easy for an illustration. Let's say you make $1000 per month. That means that your mortgage, taxes, insurance, credit card minimum payments, student loans, car payments, etc can be no more than $430/mo to keep it to 43% or less (yes..I know in practice it's really about 50%...but that's what guideline says). Now, let's say you find a rental that brings in $1000/mo, but your new PITI+HOA mortgage payment is only $800. That means that you positively cash flow +$200 month...you're better off, right? Not how Fannie figures it. Your 43% jumps when you now have income of $1000 + your new rent of $1000...a total of $2000/mo. Your expenses go from $430 and add an additional $800/mo for a total of $1230/mo. New DTI = $1230/$2000 = 61.5%. You no longer qualify. It's really a trick of math. As you add rentals, it becomes harder and harder to qualify conventionally. Yes, I know those numbers are silly, but you get the point. DSCR and Private Lending/Hard Money/Bridge Lending usually ignore the global cash flow that Conventional financing requires. That's how I usually explain it.
That’s a great way to explain it. I think the biggest takeaway is that the “best” financing really depends on the investor’s strategy and where they are in their portfolio. Conventional can be great for long-term holds, but as investors scale, the qualification requirements can become a bigger factor. Looking at how the financing affects the overall deal—and future deals—is really important.
Pacific Equity & Loan.4.684 Reviews
- 1wMike GrudzienPro MemberLender · Eugene, OR · Member since 2019 · 2k+ posts · 1k+ votes
Financing is a tool. You need many tools in your tool chest.
You don't use a hammer when you should use a wrench.- 3hNoah WrightBusiness MemberUSA, Nationwide · Member since 2024 · 157 posts · 86 votes
The fork I'd add is what the lender is actually underwriting. On the conventional side they're looking at your global income and expenses, which is why scaling gets harder after a few properties. On the DSCR side, most lenders underwrite the property's rent rather than your personal DTI, and tax returns usually stay out of it. That difference changes who qualifies and how fast you can add doors. So before comparing pricing, ask exactly what documents each lender is underwriting from. The cheapest rate on paper means little if the qualification method doesn't fit how you plan to grow.
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