How to Structure Hard Money and Private Money for a House Flip

By Josh Cote · Financing · 8 minute read

Hard money and private money do different jobs. On a lot of flips, hard money covers most of the purchase and some or all of the repairs. Private money can cover the gap the hard-money loan leaves behind. The important thing is knowing exactly what each loan pays for and what you still have to bring to the table.

Photo by Daniel McCullough via Unsplash.

Hard money is short-term money, and it is not cheap

Hard-money loans are usually short-term and are based more on the property and the project than a normal mortgage. The interest rate is only one part of the cost. Points, lender fees, draw rules, inspections, extension fees, and the payoff date matter too. Read the actual loan terms and ask when interest starts, whether you pay on the full loan amount or only money that has been used, and what happens if the repairs or sale take longer than expected.

Interest keeps running while you owe the money. For example, $300,000 at 12% interest is about $3,000 a month if the full amount is out. Run two months late and that can eat $6,000 of profit before taxes, insurance, utilities, or anything else.

Draws can leave you short on cash

Many lenders release repair money in draws after the work is done and checked. They do not hand you the whole repair budget at closing. That protects the lender, but it means you may need cash for deposits, materials, and labor before the draw comes back. Get the draw process in writing, line up contractor milestones with lender inspections, and know how much cash the project needs between draws.

Private money means a person is trusting you

Private money is different because there is a person on the other side of it. They are trusting you with their money, so be organized and straight with them. I show the lender what I think the finished house will sell for, the nearby sales that support it, the purchase and repair numbers, loan costs, timeline, and how I plan to pay them back. I also show what happens if the house sells for less or the job takes longer. A nice presentation is fine. An honest bad-case plan matters more.

Never promise that a return is guaranteed. Explain the loan terms, what secures the loan, when payments happen, and what can go wrong in plain English. Use qualified legal and tax professionals to put the agreement together.

A simple example of how the money fits together

Here is the example from the First Flip Field Guide, simplified to show the gap. It is an example, not a current quote or recommendation:

Do not assume private money should cover every dollar left over. Add up the gap, make sure the hard-money lender allows the arrangement, and agree on the private loan amount and terms before anybody sends money. A second loan against the house needs the first lender's approval.

Show the whole plan, not just the return

• What the hard-money lender will pay for and when repair draws come out;
• How much cash you need at closing and while waiting on draws;
• Monthly interest, points, other fees, and how long you expect to own the house;
• What happens if the repairs run over or the house takes longer to sell; and
• What protects the private lender, who gets paid first, and what the written loan papers say.