June 10, 2022


Hard Money Loans For Flipping Houses

Hard Money Loans For Flipping Houses

Professional house flipping can be lucrative, especially for a savvy real estate investor. You need a keen eye for the potential of a fixer upper, home renovation skills, and understanding of the real estate market. The better you are at all three, the more successful you’ll likely become. 

However, flipping houses is a substantial financial risk, especially for newbies. For instance:

  • Remodeling projects can go way over budget or take twice as long.
  • Market fluctuations can bite into your home’s selling price.
  • You could end up spending more than you make.

Worst of all, if you use a hard money loan to fund the project and default on your loan, you could lose your collateral, which in many cases is your home.

To increase your odds of success, this post will explore all the costs of flipping and loans for house flipping. I will cover:

  • How much it costs to flip a home
  • What hard money loans are and why do you need one
  • Hard money loans vs traditional loans
  • Private loans for house flipping
  • How to find hard money and private lenders
  • What to expect as a new house flipper
  • Other house flipping loans to consider

Let’s get started with this post.

How Much Does House Flipping Cost?

Before you and your partner become real estate investors and look up hard money lenders, you should know all the costs associated with house flipping projects. To be successful, the resale price of your fixer upper needs to be greater than all the costs you spend on flipping it, and be worth the value of your time. 

Here’s everything you should account for, and to make life easier, I’ll include an example at the end.

Purchase Price

The purchase price is how much money you need to buy the distressed home you’re flipping. If you’re working with a lender, you won’t be paying the full price. However, if you’re most likely going to need money for a down payment. 

If you work with a hard money lender, you should expect to put at least 20% - 25% down. The exact percentage range varies based on your experience, debt-to-income ratio (DTV), loan-to-value ratio (LTV), credit history, lender requirements, and other factors.

Renovation Costs

Flipping houses costs money. New floors and foundations, upgraded appliances, and other property improvements aren’t free! How much money you need depends on the size of the property, the severity of the renovations, and the costs of materials and labor. 

This is where real estate investment experience comes in handy! If you’re new to the house flipping business, consult with an expert to determine what needs to be done and how much it’ll cost. You should be as detailed as possible, and always assume that the renovation will cost a little more than you expect. 

Write a complete list of everything needed for the renovation, as well as the costs of material and labor, if you’re hiring help. A real estate investor can help you figure out where you can add the most value for the least amount of money. They can also identify structural issues that can prevent you from reselling the home without repairing first. 

Paying an expert to walk through the property can save you thousands—even tens of thousands of dollars, so don’t skip this step!

Homeownership Costs

While fixing up your investment property, you’re responsible for all the costs of homeownership. Since you’re probably not living there, these are easy to forget about. Here are the expenses you should be aware of.

Property Taxes

Property taxes vary depending on where you live. Research how much they are in your distressed home, and budget accordingly.


The good news is that most hard money loans are interest-only loans. This means you’re only paying the interest, not the principal, on your monthly payments. The bad news is that hard money loans have higher interest rates because they’re short-term loans, and your lender assumes greater risk. There are a few ways to negotiate a lower rate on your hard money loan (or whatever loan you get), but it’s highly unlikely that they’ll be comparable to a traditional loan’s rate.


Lenders almost always require you to purchase homeowner’s insurance to qualify for a loan. Typically, you’ll have to purchase both owner’s and lender’s insurance. Make sure your policy covers everything you need.


You need to budget for utilities you’ll be using while the property is in your name, including: gas, electricity, and water/sewer/garbage. Contact local utility companies to get cost estimates.

Homeowners Association Fees (HOAs)

If your fixer upper is in a neighborhood with an HOA, you’ll need to pay HOA dues. You should also figure out what the HOA’s rules are. Some neighborhoods require properties to be painted certain colors, have strict construction rules, or lawn care regulations.

Selling Costs

You have two options when selling the home: You can try to sell it yourself (for sale by owner), or you can hire a real estate agent to do the job for you. 

If you don’t have experience as a real estate agent, I strongly recommend hiring one. A real estate agent’s commission is typically 6% of the property’s sale price, but also covers marketing services. However, a real estate agent will know exactly how to price your home, how to upsell it, and how to negotiate closing costs. Quality agents are easily worth that 6%. If you were planning on selling the home for $200,000, but they get you $230,000 for it, that’s a 15% increase! 

If you choose to do it yourself instead, you’ll need to come up with marketing costs, know how to negotiate with the buyer’s agent, and have a clear understanding of the most recent rules and regulations, which can change all the time. Also, the property is far more likely to remain on the market longer, costing you more money. 

Again, if you’re not an experienced agent, hire one to sell your property. 

Capital Gains

If you don’t own the home for at least one year, you’ll likely have to pay a capital gain tax on your net profit. For example, if you purchase a property for $100,000 and resell it for $250,000, you realize $150,000 in capital gains and may have to pay taxes on it. 

What percentage you’ll pay depends on what tax bracket you’re in. Also, you’ll likely qualify for other deductions that can offset how much capital gain you owe. Tax law is complicated and changes every year, so I recommend contacting your accountant for more information. 

To recap, here are all the costs you should prepare for:

  • Purchase price
  • Renovation costs
  • Homeownership costs:
  • Property taxes
  • Interest
  • Insurance
  • Utilities
  • HOAs
  • Selling costs
  • Capital gains

What does all this look like in action? Let’s find out:

House Flipping Example

House Flipping Example

House Flipping Example

Jim and Pam are a married couple and new to house flipping:

  • The couple finds a distressed home for $130,000.
  • The other houses in the neighborhood sell for $280,000, more than double what this fixer upper costs.
  • They can put $30,000 down, and then get a hard money loan for the other $100,000 at a rate of 12%.
  • Jim and Pam believe it will cost $30,000 to renovate the home, but budget $40,000 just in case.
  • Jim and Pam believe they can fix and flip it in six months.
  • Property taxes cost 1% of the home’s current value.
  • Homeowner’s insurance is $1,000/yr.
  • Utilities cost $250/mo.
  • Neighborhood HOAs are $250 a quarter.
  • Since the couple doesn’t have previous real estate investment experience, they will use an agent to resell the home.
  • Jim and Pam are in the 22% tax bracket.

Let’s put all this together:



Net Profit

Final resell price



Down payment



Hard money loan



Hard money loan interest rate 



(100,000 x .12 (%) / 2 (6mos))


Renovation costs - let’s say $35,000



Property taxes


(130,000 x .01 (%) / 2 (6mos))


Homeowner’s insurance


($1,000/yr / 2 (6mos))










Selling costs 

(6% of resell price)


($280,000 x .06)


Capital gains tax 

(22% before other tax deductions)


(($280,000-$130,000) x .22(%))


Net Profit


Even if Jim and Pam have to pay the full capital gain tax, they’ll still net $56,050 for six months of work, at $9,342 a month. Not bad for their first flip! 

Now that you know what to expect, here are some of your loan options, including hard money loans, traditional lending, and private money.

What Is A Hard Money Loan And Why Do You Need One?

What Is A Hard Money Loan And Why Do You Need One?

What Is A Hard Money Loan And Why Do You Need One?

If you’re going to fix and flip a home, and you’re not buying it outright, a hard money loan is usually your best option. 

Hard money loans are short-term loans that come from individual people or private lenders, instead of traditional lenders, like banks and credit unions. 

Hard money lenders accept physical assets as collateral for the loan you need, hence the term “hard” money. These assets are usually property, but they can have many other items of hard value. Because a tangible asset(s) is involved, your lender can take ownership of them to recoup their losses if you default on your hard money loan.

Hard money loans are secured loans with fewer hoops for you to jump through. Unlike conventional loans, they usually don't have a rigorous approval process, so you can get approval and cash-in-hand in just a matter of days. Real estate investors sometimes have to move quickly, so this quick turnaround time is a huge benefit. 

Hard Money Loans vs. Traditional Loans

Traditional mortgage loans are long-term and are bound to the guidelines outlined in Fannie Mae and Freddie Mac. Fannie and Freddie are government-sponsored enterprises that purchase lenders' real estate notes. If conventional lenders want to sell a note, they must abide by Fannie and Freddie’s rules. This is particularly relevant for fix and flip projects, because distressed properties often fail to satisfy the requirements for a conventional loan. 

When they do, hard money and traditional lenders are both interested in the property purchase price and recent inspection and appraisal information. Beyond them, they often focus on different criteria.

Hard Money Lenders’ Criteria

Hard money lenders want to make a quick return on their investment. Some are interested in your credit history, your FICO score, and debt-to-income ratio (DTI), but the three main interests are:

  • Loan amount and collateral
  • Loan-to-value ratio (LTV)
  • Real estate investment experience

Loan Amount and Collateral

Your hard money lender will want to know how much capital you need, and what you’ll be offering as collateral for the loan. Your loan’s collateral is a tangible asset, usually property. Your tangible asset needs to be as valuable or more valuable than your loan amount. In extreme circumstances, if you default on your loan, your lender may take possession of this asset.

LTV Ratio

Hard money lenders want to make a quick return. Since these loans are riskier than a conventional mortgage, you need to prove that you know what you’re doing, and that the value of the real estate investment can cover the loan. In other words, they’re interested in the LTV ratio. 

You can calculate your LTV ratio by dividing the loan amount by the property’s after-repair value (ARV). Let’s say you want to buy a property with a purchase price of $130,000, and you’re putting $30,000 down. Your loan amount would be the difference: $100,000. After renovations, market research shows the property’s ARV is $225,000. Your LTV ratio is $100,000/$225,000, or roughly 44.4%. 

Usually, hard money lenders prefer an LTV ratio under 70%. Your lender needs to know that they can sell it to make good on their investment, if you default on your loan. A 70% LTV ratio also discourages house flippers from walking away from the project if things go wrong.

Real Estate Investment Experience

While your investment experience isn’t as important as your collateral and LTV ratio, having experience will help you secure better terms, such as access to a special program or a lower interest rate. You’ll know more about house flipping on your tenth home than your first, and hard money lenders will be more confident in your price assessment and ability to successfully flip a home.

Traditional Lenders’ Criteria

While hard money lenders want a quick return, traditional banks want a safer bet. Traditional mortgage lenders are more interested in your debt-to-income ratio (DTR), which helps estimate your ability to pay your loan. 

Like the LTR ratio, your DTI ratio is easy to figure out. You calculate all your debt and divide it by your monthly gross income. Let’s say your car payment, student loans, and credit card bills come to $2,000 a month. That’s your debt. Your monthly gross income is $6,000. Therefore, your DTI is $2,000/$6,000, or 33.3%. 

Usually, your DTI ratio needs to be less than 43% to qualify for a traditional mortgage loan.

Traditional lenders look at your proof of employment, tax forms, and credit score.

Traditional Loan Options For House Flipping

If you can get a traditional loan for a property you’re flipping, you have a few options available that may be more advantageous than taking out a hard money loan. It all depends on the level of house flipping you want to accomplish:

  • Renovation loans: Renovation loans are great for when you’re making improvements to a completed house. The renovation cost is built into your loan, because it’s appraised based on your home’s ARV. These loans have conventional mortgage rates and appraisals. 
  • Construction loans: If you bought land, or you’re tearing a property down and building from the ground up, consider getting a construction loan. However, if you decide to stay in the home instead of flipping it, this loan needs to be converted into a traditional mortgage. 
  • Cast-out refinance: With a cash-out refinance, you’re taking out equity you already have in another home and using it to invest in the home you’re flipping. This is a great option if you have equity, because you can usually get lower interest rates and better terms. Also, it’s less risky for lenders. 

Private Loans For House Flipping

Working with a private lender is another option. Private lenders can be anyone with extra capital and interest in investing with you. They can be a loved one, another real estate investor, an angel investor, etc. As such, the terms of your loan can be even more flexible than your contract with a hard money lender. The other limits are the confines of the law. 

Private lenders are usually more interested in building relationships with their investees. If your first venture is successful, they’ll likely be inclined to work with you again in the future. 

Some hard money lenders may also refer to themselves as private lenders, but there’s a key difference between the two:
  • Hard money lenders advertise their services and have a process for loan-qualifying applicants. They’re also available to anyone who meets their criteria. 
  • Private money lenders don’t advertise their services. They are usually someone you know or someone who wants to work with you. Depending on the terms of your agreement, they may offer to cut you deals below today’s average rates. 

How To Find Hard Money And Private Money Lenders

How To Find Hard Money And Private Money Lenders

How To Find Hard Money And Private Money Lenders

Like conventional lenders, hard money lenders are easy to find. Simply Google “hard money lenders near me” and you’ll gain access to seemingly countless pages of lenders in your area. Shop around to determine which one is best for you. 

Private money lenders are a little harder to find, because they usually don't advertise their services. Instead, you have to explore your three degrees of separation:
  • 1st Degree: People you already know, including your friends, family, co-workers, etc. Many investors get their initial funding from these connections. That’s great, if they know what they’re doing. If they’re also new to investing and things go sideways, it could end up hurting your pockets—and your relationship.
  • 2nd Degree: People connected to people in your network. These relationships are more transactional, because you don’t have a prior relationship with them. They’re harder to convert than a 1st degree connection, but if the person connecting you is good at relationship-building, your 2nd degree connection will likely be open to hearing you out.
  • 3rd Degree: People connected to your second degree connections. They’re the most difficult to reach and take the longest to convert, because they don’t know you personally or professionally. 

If you want to work with a private investor, here are a few places to find one:

  • LinkedIn (and other social media platforms)
  • Online and in-person networking groups
  • Ask your real estate agent or current/previous mortgage lender
  • Ask friends, family, and other people in your network

Alternative Loan Options

Lastly, here are a few more loans to consider.

Bridge Loans

A bridge loan is a short-term loan that helps you “bridge” the gap between when you need funding and when you can secure permanent financing. Bridge loans are commonly used in real estate transactions, particularly when you’re trying to simultaneously buy and sell a home. However, they can also provide financing while fixing and flipping a home. 

Bridge loan terms can vary greatly, most of them share the following:

  • Interest rates can range from the prime rate to the prime rate +2%. The prime rate is the lowest rate of interest you can borrow commercially.
  • The loan terms are often between 6 - 12 months.
  • You need good credit and at least 20% equity in your home.

Home Equity Loans

Home equity loans offer long-term financing, and you can usually get one at a lower interest rate than a hard money loan.  With a home equity loan, you’re borrowing against your current home’s equity and using your property as collateral.

Home Equity Line Of Credit (HELOC)

Home equity lines also act as a second mortgage. They also offer better rates, longer repayment periods, and lower closing costs than bridge loans. HELOCs are typically used to renovate your home or make other upgrades, but they can also help you with other financial situations. 

Before committing to a HELOC, read the fine print. Some of them come with prepayment fees, which charge you money if you are trying to pay off your loan early.

Personal Loans

Personal loans are flexible loans that you can take out to accomplish a goal, like financing a house flip! You need good credit and a low DTI ratio to get a personal loan. While rates vary, they can sometimes offer you a better rate than a hard money loan.

Conclusion: Hard Money Loans For Flipping Houses

While there are plenty of loans to choose from, hard money loans are usually your best option. However, it doesn’t hurt to shop around and see what loan works best for you when you’re looking to flip a home. 

Just remember, before you flip, first run through all your costs to make sure it’s worth it. You don’t want to put all of that hard work into a home that ends up costing you more than you make!

About the Author

As a native Washingtonian, Carlos Reyes’ journey in the real estate industry began more than 15 years ago when he started an online real estate company. Since then, he’s helped more than 700 individuals and families as a real estate broker achieve their real estate goals across Virginia, Maryland and Washington, DC.

Carlos now helps real estate agents grow their business by teaching business fundamentals, execution, and leadership.

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