Hard Money vs Private Money: Cost Math on a $200k Flip

Choosing your financing is the single most impactful decision you'll make on a fix and flip deal, directly controlling your holding costs and net profit. While bank loans are rarely an option for distressed properties, the real debate for investors is between hard money and private money. They sound similar, but their cost structures, speed, and requirements create vastly different outcomes for your bottom line.

Understanding the real math—not just the advertised interest rate—is crucial. We're going to break down the total cost of capital for a common fix-and-flip scenario: buying a property for $200,000 with a $50,000 rehab budget over a six-month timeline. By examining every fee, from origination points to interest on construction draws, you can see precisely how each financing type impacts your final profit.

This isn't just theory. This is the practical math that determines whether you walk away with $40,000 or $50,000 on the exact same project. Let's run the numbers.

What does a hard money loan cost on a $200k flip?

A hard money loan for a project with a $200,000 purchase and $50,000 rehab will typically cost over $21,000 in points and interest over a six-month term. These costs are front-loaded and accrue quickly, making speed essential for profitability.

Let's assume standard hard money terms for an experienced flipper: a loan covering 85% of the total project cost (Loan-to-Cost or LTC), a 12% annual interest rate, and 2 origination points. The total project cost is $250,000 ($200k purchase + $50k rehab). The lender will finance 85% of this, which is a $212,500 loan. The remaining 15%, or $37,500, is your required cash-to-close.

How are hard money origination points calculated?

Origination points are an upfront fee calculated as a percentage of the total loan amount, paid at closing. For our scenario, 2 points on a $212,500 loan equals a $4,250 fee, which is immediately deducted from your funds at closing.

This fee is the lender's primary compensation for underwriting and processing the loan. It's non-refundable, regardless of whether you pay the loan off in six days or six months. On a $350,000 After Repair Value (ARV), this $4,250 represents over 1.2% of your potential final value, making it a significant expense you must account for in your initial analysis. Some lenders might offer a lower interest rate in exchange for higher points, or vice versa, so always calculate the total cost based on your expected holding period.

How does interest accrue with rehab draws?

Interest on a hard money loan accrues only on the capital that has been distributed to you, which is a critical detail for rehab projects. You don't pay interest on the full $212,500 loan from day one.

At closing, the lender funds the purchase portion, which is 85% of $200,000, or $170,000. Your interest for the first month is calculated on this amount. The rehab funds ($42,500 in this case) are held by the lender and released in draws as you complete phases of work. For example, after finishing demolition and framing, you might request a $15,000 draw. From that point forward, your interest is calculated on a new principal balance of $185,000 ($170k + $15k). This process continues with each draw, so your monthly interest payment increases over the life of the project. Assuming you take three equal draws at the beginning of months two, three, and four, your total interest over six months at 12% would be approximately $10,200.

What is the true cost of private money for the same flip?

The true cost of a private money loan for the same $250,000 project can be significantly lower, often ranging between $7,500 and $15,000 over six months. The final cost depends entirely on your relationship with the lender and the terms you negotiate.

Private money comes from individuals—colleagues, friends, family, or other investors—rather than a formal lending institution. This means the terms are highly flexible. For this comparison, let's model a deal with a sophisticated private lender who knows you and your work. They agree to fund 100% of the project cost ($250,000) at 8% annual interest with 1 origination point. This is a common structure for investors with a proven track record.

How do private money interest rates compare?

Private money interest rates are typically lower than hard money, often falling in the 6% to 10% range. The rate you secure is based on trust, your experience level, and the lender's own desired return.

An investor lending you money from their self-directed IRA might be happy with an 8% return, as it's much better than they could get from a CD or bond. A family member might even offer 6% interest. In our 8% scenario on the full $250,000 loan (assuming 100% financing from day one for simplicity), the interest over six months would be exactly $10,000. If the loan was structured with draws like a hard money loan, the total interest would be even less. For example, a $200k initial draw with two $25k rehab draws would result in about $8,800 in interest over the six months.

Do private lenders charge points or fees?

Private lenders may or may not charge origination points, as it's a negotiable term. Many experienced private lenders charge 1 point to cover their time and effort, while a lender who is a close associate or family member may charge zero points.

In our model, we'll assume a 1-point fee on the $250,000 loan, which amounts to $2,500. This is significantly less than the $4,250 hard money fee. The only other common fees are for document preparation by an attorney, which is essential for protecting both you and the lender. This might cost between $500 and $1,500, but it ensures the loan is properly secured by the property with a promissory note and deed of trust.

How much cash do you need to close with each loan type?

You will likely need around $45,000 in cash to close with a hard money loan, whereas a 100% LTC private money loan could allow you to close with as little as $5,000. This massive difference in upfront capital is one of the most compelling advantages of building a private lending network.

The cash-to-close calculation includes your down payment, origination points, and standard closing costs like title insurance and escrow fees. Let's break down the numbers for our $200,000 purchase.

Why do hard money lenders require a down payment?

Hard money lenders require a down payment to ensure you have “skin in the game,” which reduces their risk. By requiring you to contribute 10-20% of the total project cost, they confirm you are financially stable and motivated to see the project through to a profitable exit.

In our scenario, the 85% LTC loan requires you to cover 15% of the $250,000 total cost, which is a $37,500 down payment. On top of this, you have the $4,250 in points and another estimated $3,000 in third-party closing costs. Your total cash needed to close would be approximately $44,750. While this is a substantial sum, it's far less than the all-cash purchase many new investors mistakenly believe is necessary.

Can you really get 100% financing from a private lender?

Yes, it is possible to get 100% financing for a fix-and-flip from a private lender, especially if you have a strong track record and the deal's numbers are conservative. These lenders are not bound by institutional LTC or LTV (Loan-to-Value) rules and base their decision on their trust in you and the project's viability.

With our 100% LTC private loan example, your loan of $250,000 covers the entire purchase price and rehab budget. Your cash-to-close would only consist of the 1 point ($2,500), attorney fees (~$1,000), and closing costs (~$3,000). This brings your total out-of-pocket expense down to around $6,500. This allows you to scale your business much faster by keeping your capital free for the next deal, a strategy used by many high-volume flippers in markets like those detailed on our markets page.

Hard Money vs. Private Money: A Side-by-Side Cost Breakdown

Seeing the final numbers side-by-side reveals the true financial impact of your lending choice. The following table compares our two scenarios—a standard hard money loan and a favorable private money loan—for the same six-month flip.

We assume a $200,000 purchase, $50,000 rehab, and $350,000 ARV. We've also factored in typical selling costs (commissions, closing costs) at 7% of the ARV, which is $24,500, and monthly operating costs (utilities, insurance) of $500/month for six months, totaling $3,000.

Private money closing costs include higher legal fees for custom document creation.

While the net profit difference is less than $2,000, the critical takeaway is the cash-to-close. The private money deal requires nearly $40,000 less cash upfront, allowing an investor to pursue multiple projects simultaneously.

When does hard money make more sense than private money?

Hard money is the superior choice when you need to close a deal quickly and lack an established network of private lenders. Its standardized process and speed provide a reliable tool for securing properties in competitive markets.

If a great deal appears and needs to close in 14 days, you may not have time to find a private individual, explain the deal, and have legal documents drafted. A hard money lender you have a relationship with can often underwrite the property and wire funds in 7-10 business days. This speed is a competitive advantage that can be worth the extra cost, especially in hot markets like Tampa, FL, where good deals disappear quickly.

How fast can you close a hard money loan?

You can typically close a hard money loan in 7 to 15 business days, compared to the 30 to 60 days required for conventional financing. This speed is possible because the lending decision is based almost entirely on the asset's value, not your personal income or credit history.

The lender's focus is the deal itself: the purchase price, the rehab budget, and the ARV. If the numbers fit their model, like the popular 70% rule, approval is rapid. You can run your own scenarios and see if a deal fits this mold using our free fix-and-flip analyzer.

What are the non-financial benefits of hard money?

Beyond speed, hard money lenders offer significant non-financial benefits, including professional draw management, market expertise, and a standardized, repeatable process. A good hard money lender acts as a partner, providing a second set of eyes on your deal.

Their draw process, while seeming restrictive, imposes discipline on your rehab budget and timeline. They inspect work before releasing funds, preventing you from getting ahead of yourself or using funds for unintended purposes. This structure is invaluable for new investors and helps experienced investors manage multiple projects efficiently. They have seen hundreds of flips succeed and fail, and their approval is a form of validation for your project.

When is private money the better financing option?

Private money is the better option when your priority is minimizing costs and maximizing flexibility, and you have already cultivated a network of individuals with capital to invest. It allows for bespoke loan terms that can dramatically improve profitability and reduce upfront cash requirements.

For investors who have put in the time at local real estate meetups and built a reputation for successful execution, private money is the holy grail of flip financing. The trust you've built allows you to negotiate terms that an institution never could, such as 100% financing, no points, or even an equity-split arrangement instead of debt. This is how many investors scale from one or two deals a year to a high-volume business, especially in well-networked communities like Phoenix, AZ.

How do you find and structure a private money deal?

You find private money lenders through networking at real estate investor associations (REIAs), financial advisory firms, and within your own professional and personal circles. The key to structuring the deal is to always use an attorney to draft a promissory note and a deed of trust or mortgage to secure the loan against the property.

Never take money from a private lender on a handshake. The documents should clearly state the loan amount, interest rate, payment schedule, maturity date, and what happens in case of default. Presenting a professional loan package to a potential lender, complete with comps and a detailed scope of work, demonstrates your professionalism and significantly increases your chances of getting funded.

What are the risks of using private money?

The primary risks of using private money are damaging personal relationships if the deal goes sour and navigating non-standard loan terms that can create confusion. Unlike a hard money lender, a friend or family member may react emotionally if the project is delayed or loses money.

Clear communication and legally sound documentation are your best mitigation. Ensure your private lender understands the risks of real estate investing upfront. Ambiguity is your enemy. If a term is not written down, it can become a point of contention later. While the financial benefits are alluring, they come with a higher degree of personal responsibility to protect your lender's capital and your relationship.

The Bottom Line

Neither hard money nor private money is universally “better”—they are different tools for different situations. Hard money offers a fast, reliable, and scalable system for acquiring properties, making it an indispensable tool for seizing opportunities. Its higher cost is the price of speed and convenience.

Private money, on the other hand, is a powerful advantage earned through networking and a strong track record. It offers lower costs and unparalleled flexibility, most notably the ability to finance 100% of a project and preserve your capital. For a typical flip, a good private money loan can save you thousands in fees and reduce your cash-to-close to a fraction of what a hard money lender requires.

Ultimately, successful investors often use both. They might use hard money to snag a deal on a tight deadline, then use private money for a project with a longer timeline. Analyze every deal's specific needs, run the numbers with a tool like the 70 Percent Rule Calculator, and choose the financing that best aligns with your capital, timeline, and strategic goals.

Frequently asked questions

Can I use a hard money loan for my first fix and flip?

Yes, you can and many first-time flippers do. Lenders will scrutinize the deal's numbers more carefully and may offer slightly less favorable terms, such as a lower LTC (e.g., 80% instead of 85%) or a higher interest rate, but a strong deal will still get funded.

Is private money lending legal?

Yes, private money lending is completely legal, provided it is documented correctly. Both the borrower and the lender must adhere to state and federal lending laws, and the loan should be secured with a legally binding promissory note and a recorded deed of trust or mortgage to protect all parties.

What happens if my flip takes longer than the loan term?

If your project exceeds the typical 6-12 month term, you'll need to request a loan extension. Hard money lenders usually charge a fee for this, often 1-2 points of the outstanding loan balance, and will continue to charge interest. With a private lender, the consequences depend on your agreement; some may be flexible, while others may have stricter default clauses.

Does my credit score matter for these loans?

Your credit score is a minor factor for hard money loans but can be more important for private money. Hard money lenders focus primarily on the property's value (the “hard” asset). A very low credit score (<600-620) might be a red flag, but a high score doesn't guarantee a better rate. Private lenders, who are lending based on trust, may place more weight on your overall financial responsibility, which includes your credit history.

Can I refinance a hard money loan?

Yes, refinancing a hard money loan is a common strategy. Investors often use a hard money loan for the quick acquisition and rehab, then refinance into a long-term conventional loan once the property is stabilized and rented out. This strategy is known as BRRRR (Buy, Rehab, Rent, Refinance, Repeat).