Hard Money Loan

A hard money loan comes from a private lender for a short term, and approval rests chiefly on the property, with the borrower's income a secondary concern. Rates and fees are higher than bank mortgages, so cash on cash return while the loan is in place is often low or negative. The loan is a bridge to a rehab and a refinance.

As an illustration, $400,000 at 12% interest only on the default property would cost $48,000 a year against $40,210 of NOI, a cash shortfall of about $7,800. Nobody holds a rental on those terms. The plan is to renovate, raise the value and rent, then move to a long-term loan.

For that reason, measure cash on cash on the permanent financing, not the hard money phase. Count the carrying costs, points and rehab during the bridge as cash invested. That gives an honest denominator once the property is stabilized and refinanced.

Further reading: Hard Money Loan on Wikipedia.