The Complete Guide to Hard Money Lending for Real Estate Fix-and-Flip Investors

What is a Hard Money Loan and Who Are Private Lenders?

A hard money loan is a short-term, asset-based debt instrument funded by private investment companies or private debt syndicates rather than traditional commercial banks or government-backed programs.

While banks scrutinize a borrower tax returns, debt-to-income (DTI) ratios, and historical liquidity, hard money lenders prioritize the collateral real estate asset: its current purchase price, scope of renovation, and projected After-Repair Value (ARV). Because private lenders make autonomous credit decisions, loans can be funded in 5 to 10 business days, giving investors a critical advantage in competitive property auctions.

The 70% Rule and the Maximum Allowable Offer (MAO) Formula

Professional real estate flippers rely on the 70% Rule to evaluate acquisition feasibility and prevent overpaying for distressed inventory:

Maximum Allowable Offer (MAO) = (After-Repair Value * 70%) - Estimated Repair Costs

The 30% margin encompasses lender financing costs (points and interest), closing fees, property taxes, insurance, realtor disposition commissions (5% to 6%), and the investor net target profit. In hyper-competitive metro markets, investors sometimes adjust the rule to 75% or 80%, but this narrows the margin of safety.

-- SQL model to compute MAO and deal viability:
SELECT 
  property_address,
  after_repair_value AS arv,
  estimated_repairs,
  ROUND((after_repair_value * 0.70) - estimated_repairs, 2) AS max_allowable_offer,
  asking_price
FROM flip_pipeline;

Loan Terms Breakdown: Interest Rates, Points, and Draw Schedules

Hard money loans carry distinct pricing structures reflecting short investment horizons and higher underwriting risk:

• Interest Rates: Typically range from 9.0% to 13.5%, structured as interest-only monthly payments.

• Origination Points: Upfront fees ranging from 1 to 3 points (1% to 3% of the total loan commitment), paid at settlement.

• Construction Escrow Holdbacks: Lenders do not disburse the renovation budget at closing. Funds are held in an escrow account and released in "draws" after verified completion of construction milestones via third-party site inspections.

Exit Strategies: Retail Disposition vs BRRRR Refinance

Every hard money loan requires a clearly defined, documented exit strategy prior to loan origination:

1. Retail Flip Sale: Upon completing renovations and staging, the property is listed on the MLS and sold to an owner-occupant buyer, completely retiring the hard money debt and distributing cash profits.

2. The BRRRR Strategy (Buy, Rehab, Rent, Refinance, Repeat): Instead of selling, the sponsor leases the property to stabilized tenants and executes a cash-out refinance into a 30-year fixed DSCR loan, pulling out their initial capital while retaining a cash-flowing asset.

Frequently Asked Questions