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What Is 'Hard Money' In Real Estate Investing, And How Does It Work?

The term "hard money loan" refers to a type of loan that is backed by a “hard” asset, such as real estate. If you’re a real estate investor or house flipper and you need financing for a deal, a hard money loan might be a good option for you to explore.


But as a real estate investing coach who often helps clients navigate the hard money transaction process, I know it's important to first understand the ins and outs of these loans before making a final decision.




What is 'hard money?'


Hard money is a type of lending often used in real estate investing. Hard money loans are also known as asset-based loans, bridge loans or STABBL loans (short-term asset-backed bridge loans). Hard money loans are used for short-term financing, and the loans are always secured by an asset. Traditional financial institutions don’t offer hard money loans, so this lending option is only available through private lenders and individual investors.

As I mentioned above, hard money loans are often used by real estate investors, house flippers and real estate developers. These types of loans can be a quicker and easier way to secure an investment purchase without the need for traditional financing or the approval process that is required by typical financial institutions. Since these types of loans are asset-based, they are not contingent on the borrower's creditworthiness.


When might it make sense to use hard money in real estate deals?


The purpose of using these types of loans is to secure a property to renovate or develop and ultimately sell it for a profit. An investor might choose a hard money loan over a conventional loan because of the ease of access to the funds. Lending options from financial institutions often have complicated approval processes and weigh heavily on the borrower for approval. Hard money loans are asset-based and typically secured by a mortgage, so their approval process is much faster. In my experience, lenders will review the subject property and can make a lending decision within days.


That being said, these loans are not always the best choice for everyone. Understand that when you acquire a hard money loan, you’ll be paying a premium for the convenience. Not only do these types of loans carry higher percentage points than traditional loans, but they may also come with additional costs and fees. The closing costs on your investments are likely to be more with a hard money transaction as well.