DSCR Direct

Hard Money Loans: Great for Acquisition, Expensive for Holding

Hard money loans are a powerful tool for real estate investors. They close fast (often in under two weeks), have flexible qualification requirements, and fund deals that banks will not touch - like distressed properties, fix-and-flips, and time-sensitive acquisitions. But that speed and flexibility comes at a cost.

Typical hard money rates run 10-14%, with 2-4 points charged upfront. On a $250,000 loan, that is $2,500/month in interest alone, plus $5,000-$10,000 in points at closing. Hard money is designed for short-term use - 6 to 18 months - not for long-term holding. Every month you stay in a hard money loan beyond what is necessary, you are burning cash that should be going toward your next deal.

The BRRRR Strategy: Hard Money to DSCR

The smartest investors use hard money for what it is good at - acquisition and rehab - then refinance into permanent financing as soon as the property is stabilized. This is the core of the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat).

Here is how it works: Use hard money to buy and renovate a property. Once the rehab is complete and a tenant is in place, refinance into a DSCR loan. The DSCR loan qualifies based on the rental income - not your personal income - so as long as the rent covers the mortgage, you are approved.

The math speaks for itself. A hard money loan at 12% on $250,000 costs $2,500/month. A DSCR loan at 6.25% on the same amount costs about $1,539/month. That is nearly $1,000/month in savings, or about $12,000/year - money that goes straight to your bottom line.

When to Exit Hard Money into DSCR

The ideal time to refinance from hard money to DSCR is when three things are true: the rehab is complete, you have a tenant in place (or can show market rents), and the property appraises at the after-repair value. Most DSCR lenders will do a cash-out refinance at up to 75-80% of the appraised value, which often means you can pull out most or all of your original investment and repeat the process.

Do not wait until your hard money loan is about to expire. Start the DSCR refinance process 60-90 days before maturity to avoid extension fees and the stress of a tight deadline.