A hard money loan is a short-term loan from a private lender, secured by the property itself. Hard money lenders commonly focus on the deal, meaning the purchase price, repair budget and after-repair value, more than on your income. Investors use hard money for flips and for the buy and rehab stages of a BRRRR because it can often close faster than a bank loan and can fund houses in poor condition.
The trade-off is cost. Terms vary widely by lender, but rates are commonly well above conventional mortgage rates, payments are often interest-only, loans commonly run from about 6 months to 2 years, and most lenders charge points up front.
Example: you borrow $200,000 at 11% interest-only with 2 points for a six-month flip. Points cost $200,000 × 2% = $4,000. Interest is $200,000 × 11% = $22,000 a year, or $11,000 for six months. Total financing cost is $4,000 + $11,000 = $15,000, before any other lender fees.
The most common mistake is budgeting for the best-case timeline. If the project runs three months over, that is another $5,500 of interest, and the loan may come due before you have sold or refinanced. Budget extra months, ask what an extension costs and know your exit before you sign.