Finding the right commercial property isn’t easy, and speed is everything. 70% of investors plan to expand their portfolios in 2025 and competition for properties is fierce. Once you find an opportunity, you need to move fast to secure it.
That’s part of the challenge. In our current economic environment, financing is a major obstacle. Over 50% of banks report tightening their standards across all commercial real estate classes. This means getting approval takes even longer and moves too slowly for today’s fast-paced market.
So, where does that leave real estate investors? One way to overcome these constraints is to work with private lenders for commercial projects. When you need to move quickly, or traditional financing isn’t an option, hard money loans can provide the capital to seize opportunities.
What are commercial real estate hard money lenders?
Commercial hard money lenders provide real estate investors with short-term private money loans. These private lenders face less regulation and don’t have the same lending process as a traditional bank. For real estate investors, it means greater flexibility and speed when funding investment property.
The trade-off for this convenience and speed is shorter loan terms with higher interest rates.
Hard money vs bank loans
Commercial hard money loans differ from traditional bank loans in almost every way. The right loan directly impacts your real estate investment strategy. These differences affect everything from initial qualification to final payoff, and understanding them can help you make the right financing choice.
Here’s how they compare:
| Features | Hard money lenders | Banks |
| Timing | Fast- days to weeks | Slow – 30-90 days |
| Funding source | Private investors | Deposits and institutional capital |
| Primary qualification | Property value | Borrower’s creditworthiness |
| Interest rates | Higher | Lower |
| Loan terms | Short – 6 months to 5 years | Long – 5 to 10 years or more |
| LTV ratio | Higher | Lower |
| Flexibility | Flexible payment terms and options | Rigid terms and payment schedules |
| Documentation | Less extensive | More involved |
| Property types | Willing to finance non-traditional or distressed properties | Focus on lower risk and traditional properties |
How do hard money lenders work?
These lenders raise capital and use it to fund commercial real estate loans that offer a high return on investment. These loans prioritize evaluating the property’s value and overall potential before approving a loan. If the investor can’t repay, the private money lender has the right to take back the property.
Lenders evaluate investment properties using a risk-based approach, weighing the opportunity against the asset itself. They provide shorter-term loans that minimize exposure to market changes and allow them to see a quicker return on capital. Additionally, a private hard money lender considers the investor’s exit strategy and repayment plan before issuing a loan.
Hard money lenders offer several loan types to meet different investment needs, such as:
- Purchase loans
- Bridge loans
- Renovation loans
- Cross-collateral loans
- Refinance loans
Interest rates on hard money loans
Rates on these loans can be around 3% to 8% higher than conventional loans and may have added costs like origination fees and points.
The exact interest rate depends on factors such as the property’s value, the loan-to-value (LTV) ratio, and the borrower’s experience. Lenders charge higher rates for riskier projects or loans with a lower LTV.
Types of hard money lenders
There are three main types of commercial hard money lenders:
- Private individuals: Wealthy individuals or small groups may lend their own money to investors. They’re usually more flexible with loan terms and open to riskier projects.
- Lending companies: Mid-size firms with more capital than individual lenders. They may have more adaptable terms but higher rates than institutional lenders.
- Institutional hard money lenders: This type of lender pools funds from multiple investors to provide hard money loans for commercial real estate. They may be publicly traded or associated with a larger financial organization.
When to use a hard money loan?
Your timing needs and market situation help determine when hard money financing makes sense. Some investors use these loans as their primary strategy, while others view them as a backup option when traditional financing falls through.
Depending on the investment strategy, hard money loans for commercial real estate serve different purposes, including:
- Fix-and-flip projects: Investors who buy commercial properties to sell quickly for a profit can use hard money purchase loans for expedited access to capital. These deals require fast funding so investors can act quickly. Plus, renovations can be unpredictable, and commercial hard money lenders can help cover unexpected costs.
- Bridge financing: These loans provide temporary gap financing until investors can secure a traditional bank loan. Hard money bridge loans can fund property upgrades or leasing efforts, helping investors meet loan-to-value requirements for traditional commercial loans.
- Distressed property investments: Distressed properties often don’t qualify for conventional bank loans until they’re renovated, leased, or stabilized. Hard money loans can fund these improvements and also help resolve financial issues like housing fines or delinquent property taxes.
Pros and cons of hard money loans
Hard money loans aren’t right for every deal, but they can be exactly what you need in certain situations. Success depends on knowing when the benefits justify the costs. Like any financing option, hard money loans have their benefits and trade-offs:
Pros
- Quick approval and funding: Many lenders approve hard money loans in as little as one day, and investors can see the funds in less than a few days. This allows investors to make competitive offers, knowing that they have access to funds and can close quickly.
- Flexible loan terms: Since private money loans come from non-bank lenders, they have less regulation and underwriting requirements.This translates into more flexible terms like repayment schedules, interest rates, and loan durations. For example, lenders might offer interest-only payments or loans from 6 months to 4 years.
- Easier access to financing: Conventional lenders have strict requirements that can slow down the process or deny a loan. Hard money loans require less documentation and don’t have as many funding rules, so they are a more accessible option.
- Higher approval rate for poor credit borrowers: Since these are collateral-driven loans that focus heavily on the property as collateral, borrowers with lower credit scores may still qualify. This opens up more opportunities to invest and scale their real estate portfolios.
- Suitable for high-risk investments: A traditional commercial lender may deny properties that are distressed, have environmental issues, or fall into an asset class they avoid or have too much of in their portfolio. Hard money loans give investors a way to finance these opportunities and put their investment strategies into action.
Cons
- Higher interest rates: One of the biggest downsides is higher interest rates. These rates give private lenders a strong return for taking on additional risks that traditional lenders won’t.
- Shorter loan terms: Private money loans have shorter repayment periods, which investors need to factor into their overall strategy. At some point, investors must sell the property, refinance with a traditional commercial loan like a DSCR loan, or use alternative funding such as mezzanine debt.
- Higher loan costs and fees: In addition to interest rates, hard money loans usually have higher origination fees, points, and other costs. For example, origination fees can be 2% to 4% higher than traditional commercial real estate loans.
- Lower LTV ratios: For some projects, private lenders may require more equity in the property to reduce their risks. In these situations, investors may need to provide more upfront capital for a larger down payment.
- Limited financing for owner-occupied properties: Hard money lenders focus exclusively on real estate investment property and don’t offer loans for owner-occupied commercial real estate.
- Risk of foreclosure: Since lenders use the property to secure these loans, defaulting can lead to a quick foreclosure process. Investors who can’t find alternative financing or successfully implement their strategy risk losing the investment asset.
Legal and regulatory considerations
Here are a few things to be aware of when it comes to laws and regulations around hard money lending:
- State regulations: Some states require commercial hard money lenders to be licensed and may have rules on interest rates. They may also regulate lending practices to verify compliance with anti-money laundering laws.
- Foreclosures: Investors should be aware of state-specific foreclosure laws and how defaulting on payments can affect property ownership and recovery.
- Disclosures: Some states have specific disclosure requirements to confirm investors understand key details like prepayment penalties, broker commissions, payment schedules, and total loan amounts.
How to qualify for a hard money loan?
The investment property itself is the main factor in qualifying for a commercial hard money loan. It needs enough value for the lender to feel confident about recovering their investment if you default. Loan-to-value requirements vary by lender and depend on the project and opportunity.
Lenders also look at how you plan to repay the loan, which is usually through refinancing or selling the property. If you have experience with similar projects, it can help the lender’s confidence in your ability to execute the plan. Even though these are asset-based loans, you also may need to provide financial documents like proof of income, and lenders might check your credit score.
Best practices to follow when taking hard money loans
If you decide to use a hard money loan, here are some tips to help you make the most of it:
- Review loan terms carefully: Since hard money lenders protect their interests with higher fees, shorter repayment periods, and other costs, be sure to review all of the loan terms. If anything is unclear, consider consulting a real estate attorney before signing.
- Verify the lender’s reputation: To confirm you’re choosing the right lender for your needs, research their reviews, testimonials, and industry ratings. The last thing you want is to work with a lender with unclear terms or poor communication that could slow down the process and cost you the deal.
- Keep track of your credit score: Even though lenders focus primarily on the property you are looking to buy, some may still factor in your credit history to determine loan terms. If you have a stronger credit profile, this could help you qualify for better rates and lower closing costs or other fees. Take advantage of your free annual credit report to check your score and identify areas for improvement.
- Understand prepayment penalties: Some hard money loans include penalties for paying off the loan early. These fees impact your project’s profitability, especially if your plan is to refinance or sell the property quickly. Ask about any prepayment penalties upfront and compare lenders to find better terms if needed.
- Have a clear exit strategy: Create a plan that accounts for market conditions, potential delays, and any factors that could impact your ability to repay the loan. Be prepared to adjust if circumstances change to avoid the risk of default and foreclosure.
Is a hard money loan a good investment?
The answer to this question depends on many factors. If waiting 30-90 days for traditional loan approval isn’t an option and you plan to sell or refinance quickly, a hard money loan can be a smart choice. It’s also useful when a property needs improvements before qualifying for conventional financing.
This loan option isn’t ideal for every scenario because of the premium costs and compressed timelines. However, if you have a good strategy and can work within these constraints, it can be a good investment to provide the capital you need to support your project.
Conclusion
When traditional financing isn’t an option or speed is critical, hard money loans provide investors with an alternative path forward. Their usefulness depends on matching the right project with this specialized financing tool. Consider your investment strategy, the specific property, and your ability to manage risks to decide if this financing approach is right for you.
