Hard money loan = short-term asset-based financing secured by real estate, typically from private lenders or investor groups rather than banks.

Used for: (1) Fix-and-flip projects (buy distressed property, renovate 3-6 months, sell for profit), (2) Bridge loans (temporary financing until permanent loan or property sale), (3) Construction/rehab when traditional lenders won't approve, (4) Fast closings (7-14 days vs 30-45 days for conventional). **2025 cost breakdown**: Interest rates 8-15% (vs 7-8% conventional) - higher rates for riskier deals/borrowers with poor credit.

Points (upfront fees) 2-5 points = 2-5% of loan amount. $200K loan at 3 points = $6K due at closing.

Typical structure: 2 points origination + 1-2 points processing.

Loan-to-Value (LTV) limits: 65-75% of After Repair Value (ARV) or current value (whichever lower). $300K ARV property → max $225K loan at 75% LTV.

Must bring 25-35% cash/equity.

Terms: 6-24 months (most common 12 months).

Interest-only payments during term, full principal due at maturity (balloon payment).

Extension fees if need more time: 1-2 points + higher rate. **Example total cost**: $200K hard money loan at 12% interest, 3 points, 12-month term.

Points: $6K upfront.

Interest: $200K × 12% = $24K annual ÷ 12 = $2K/month × 12 = $24K.

Total cost = $6K + $24K = **$30K for 1 year** (15% effective rate including points).

Additional fees: Appraisal ($500-800), title/escrow ($2K-3K), underwriting ($500-1K), draw inspection fees for construction ($300-500 per draw).

All-in cost often 15-20% of loan amount for 12-month term. **When it makes sense**: Quick acquisition (off-market deal, foreclosure auction, estate sale requiring 7-day close), Short timeline to exit (confident 6-month flip, bridge to refinance after renovations raise value), No conventional approval (recent bankruptcy, low credit score, property in poor condition banks won't finance), High profit potential (buy $200K, renovate $50K, sell $350K = $100K gross profit - $30K hard money cost = $70K net still profitable). **Red flags**: Holding >18 months (interest costs compound, consider refinancing to conventional), Market downturn risk (can't sell, stuck with high payments and balloon due), Over-leveraging (75% LTV leaves thin margin for cost overruns or value miscalculation).

Hard money loan analysis formula: **Net Profit = Sale Price - (Purchase + Renovation + Hard Money Costs + Holding Costs + Sale Costs)**.

Break-even analysis: Total costs must be <80% of ARV to leave profit margin + safety buffer. **Step-by-step calculation example**: (1) Property analysis: Purchase price $180K (distressed), ARV after renovation $280K (comps confirm), Renovation budget $40K (contractor quotes). (2) Hard money loan structure: LTV 70% of ARV = $280K × 0.70 = $196K max loan (covers $180K purchase + $16K of renovation).

Need $24K cash for remaining renovation costs.

Interest rate 11%, 3 points, 9-month term.

Points cost: $196K × 3% = $5,880 due at closing.

Monthly interest: $196K × 11% ÷ 12 = $1,797/month. 9-month interest: $1,797 × 9 = $16,173.

Total hard money cost = $5,880 + $16,173 = **$22,053**. (3) Additional holding costs (9 months): Property taxes $250/month × 9 = $2,250, Insurance $100/month × 9 = $900, Utilities during renovation $150/month × 9 = $1,350, Total holding = $4,500. (4) Sale costs: Realtor commission 6% × $280K = $16,800, Closing costs ~1% = $2,800, Total sale costs = $19,600. (5) **Total all-in cost**: Purchase $180K + Renovation $40K + Hard money $22,053 + Holding $4,500 + Sale $19,600 = **$266,153**.

Sale price $280K - Total cost $266,153 = **$13,847 net profit** (5% return on $280K sale, 27% return on $50K cash invested [$24K renovation gap + $26K down payment if 85% LTV used]). **Is it worth it?** Thin margin - only $13,847 cushion.

If renovation goes 10% over ($44K instead of $40K) or sale price 5% lower ($266K instead of $280K), profit evaporates.

Need bigger spread for safety.

Better deal structure: Find property with 30%+ margin ($210K all-in cost on $280K ARV = $70K profit = 25% spread). **Alternative calculation - 70% rule**: Maximum purchase price = (ARV × 0.70) - Renovation costs.

For $280K ARV, $40K renovation → Max purchase = ($280K × 0.70) - $40K = **$196K - $40K = $156K** to hit 30% margin.

Actual purchase $180K is $24K above safe limit → risky deal unless confident in ARV or can reduce renovation costs. **Break-even point**: Minimum sale price to avoid loss = Total costs $266,153 ÷ 0.94 (after 6% commission) = **$283,184 break-even**.

Selling below $283K = loss.

Only $3,184 cushion below $280K target → very tight. **When hard money works best**: 40%+ gross margin deals (buy $150K, renovate $30K, sell $280K = $100K gross - $45K all costs = $55K net = 30% return), Fast execution <6 months (minimize interest accumulation), Multiple exit strategies (can refinance to conventional if market softens, rent if can't sell immediately), Experienced investor (accurate renovation budgets, proven sale timelines, backup capital for overruns).