What’s a Hard Money Loan?

Stuart Gethner

By Stuart Gethner

I remember some advice that my father taught me while growing up in Chicago when I was a tad younger. He said, “Never borrow money from someone who is not in a suit and tie.” At the time, my dad’s advice was spot-on as I was aware there were various thug types who provided financing on unsavory terms.

When I reflect, I recall how proud my dad’s relationship was with Mr. Dierlan, his personal banker at Amalgamated Bank. However, times have changed and I’m pretty sure my dad didn’t envision Chase’s Mobile Check Deposit, where you take a picture of a check with your phone and funds are directly deposited into your on-line checking account that has auto bill pay features.

As the times have changed, so has lending. There are now Rocket Mortgages contending with “When Lender’s Compete, You Win.” Back in my dad’s era, there weren’t fix-and-flips. There was just fix-and-lives.

In the old days, one would need a rich uncle to borrow short-term money while one worked on a project and then paid back the money when the project sold.

As “necessity is the mother of invention,” it became the birth of a hard money lender (HML).

An HML is the place to borrow short-term money while working on a project and then repaid when the project sold. Could the project be antique car restoration? Yes!

Here’s the gold nugget: a hard money lender is an asset-based lender. That is, the amount of the loan is based on the value of the asset. The loan has nothing to do with a person’s job, credit score, credit report or current savings. I have ascertained funding on a project without filling out an application! How could this be? Because the loan is asset based. The lender does not care about me. It’s all about the asset.

In every instance, the HML “wins” if you do or do not pay them back.

If you pay them back, they win as they made a high interest rate on a short-term loan! If you don’t pay them back, they win because they get to keep your asset that has more value than what is owed. Could the asset be a Renoir or Rembrandt painting? Of course!

Some things to remember: hard money lenders will only lend on non-owner occupied residential real estate. The borrower will be required to put a minimum of 10 percent down. The interest rate will be higher than a traditional loan. The term will be for six months with a six-month extension, if needed. Some require monthly payments while others accept payment in-full when the property sells.

Here’s a simple example:

A house, all fixed-up, has a market value of $200,000. Our investor can buy the house for $130,000. Aft er putting $20,000 of repairs and added value, they then sell the property for $200,000.

An HML would lend up to 90 percent of the purchase price requiring 10 percent ($13,000) down.

In today’s market, a six-month (short term) interest-only loan would have an average interest rate of 12 percent.

So, remember a true HML never wants you to qualify for the loan. The question the HML asks is, “Does the asset qualify for the loan?”

Feel free to reach out if you have more questions or need more information.


Stuart Gethner is a full-time practicing real estate investor and consultant in Scottsdale, Arizona. He facilitates workshops on real estate investing to investors and REALTORS all over the country, creating additional income. For his free e-Book, “Strategies to Work ON and NOT IN Your Business” go to StuartGethner.com/eBook