A hard money loan is a short-term loan against a house, made by a fund or a private lender rather than a bank. On a flip it does one job: it covers most of the purchase and the rehab for the months you own the property, then gets paid off out of the sale.
The price comes in two parts, and both show up in the flip calculator as Loan points and Interest rate.
What are points, and what does the interest cost?
Points are a fee charged up front, written as a percentage of the loan. Two points on a $185,250 loan is $3,705, due at closing.
The interest is usually charged on the whole loan every month whether you have spent the rehab money or not, and usually interest only. Nothing reduces the balance, so at 10% on $185,250 you pay $1,544 a month, and you still owe $185,250 at the end.
Take a house bought for $165,000 with a $45,000 rehab, sold at a $300,000 sale price after six months. Holding costs run $950 a month. The lender wants 15% down, charges 2 points and 10% interest, and includes the rehab in the loan. Those terms are this example’s assumptions, not a quote.
That makes the loan 85% of the price plus the full rehab: $140,250 plus $45,000, so $185,250.
| 10% and 2 points | 12% and 3 points | All cash | |
|---|---|---|---|
| Sale price | $300,000 | $300,000 | $300,000 |
| Selling costs (8%) | −$24,000 | −$24,000 | −$24,000 |
| Purchase price | −$165,000 | −$165,000 | −$165,000 |
| Buying closing costs (2%) | −$3,300 | −$3,300 | −$3,300 |
| Rehab | −$45,000 | −$45,000 | −$45,000 |
| Holding costs (6 months) | −$5,700 | −$5,700 | −$5,700 |
| Loan points | −$3,705 | −$5,558 | – |
| Loan interest, 6 months | −$9,263 | −$11,115 | – |
| Net profit | $44,032 | $40,327 | $57,000 |
These are example figures, not a quote.
Why does the smaller profit beat the bigger one?
The all-cash column makes $12,968 more, and it is the worse deal for most people.
Paying cash means $219,000 of your own money sits in this house for six months. That is a 26% return on cash. Borrowing leaves $46,718 in the deal, made up of the $24,750 down payment, $3,300 of closing costs, the $3,705 of points, $9,263 of interest and $5,700 of holding costs. A $44,032 profit on $46,718 is 94.3%.
The calculator shows both figures: Your cash in the deal, and Return on cash underneath it. The loan cost has its own row, called Cost of the money.
There is a second reason, and it does not appear in either column. The $219,000 buys one house. The $46,718 buys one house and leaves you the cash to buy another.
What happens if the flip takes longer?
Interest is the only cost in the stack that keeps running, so time is priced in months.
At 10% on $185,250, every extra month costs $1,544 in interest plus $950 in holding costs, so about $2,494. Three months over plan takes the profit from $44,032 to $36,551 and the return on cash from 94.3% to 67.4%.
That is the real risk in a hard money loan. The loan also has a maturity date, often six or twelve months, and if the house has not sold by then you are asking for an extension, which normally costs another point. How long it takes to flip a house has the timeline the months come from.
Is a hard money loan on a flip a consumer mortgage?
No, and that changes what protections come with it. The Consumer Financial Protection Bureau’s commentary on Regulation Z says that credit extended to acquire, improve or maintain rental property that is not owner-occupied is deemed to be for business purposes (comment 3(a) of the Regulation Z commentary).
Business-purpose credit sits outside the consumer mortgage rules, so the disclosures you may have seen on a house you lived in are not part of the deal. Read the note and the term sheet instead: the maturity date, the extension fee, the prepayment terms, what triggers a default and whether the rehab money comes in draws after work is inspected.
That same commentary sets a limit worth knowing. If the owner expects to occupy the property for more than 14 days in the coming year, it is not treated as non-owner-occupied, and the business-purpose rule does not apply. Living in the flip while you work on it is a different transaction.
Who is a hard money loan actually for?
It fits a house that a bank will not lend on, on a timetable a bank cannot meet. A property that needs $45,000 of work does not appraise as habitable, so conventional financing usually stops at the front door, and a seller taking a two-week close will not wait for one either.
It does not fit a thin margin. This example clears $44,032 on a $300,000 sale, a 14.7% margin, which absorbs the $12,968 of loan cost. Run the same loan on a deal making $12,000 and the money costs more than the profit. How much profit a flip should make covers where that line sits, and what a flip actually costs covers the rest of the stack.
Before you take terms, put the lender’s actual points, rate and months into the flip calculator and watch two numbers: Cost of the money, and how far Net profit falls if the sale slips a quarter. If three extra months wipe out the deal, the problem is the deal, not the lender.