Cap rate (capitalization rate) is net operating income divided by purchase price. It tells you the unleveraged return a property generates. A $300,000 property producing $18,000 NOI has a 6% cap rate. It's the most common metric for comparing rental properties because it strips out financing and gives you an apples-to-apples comparison.

What is a good cap rate for rental property?

For residential rentals, 5-8% is generally considered solid. Above 8% is excellent but often comes with higher risk (rougher neighborhoods, older buildings, declining markets). Below 5% is common in expensive metros where investors rely more on appreciation than cash flow.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing — it measures the property's return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested, factoring in your mortgage. A property with a 6% cap rate could yield a 12% cash-on-cash return with leverage.

What is the 1% rule in real estate?

The 1% rule says monthly rent should be at least 1% of the purchase price. A $200,000 property should rent for at least $2,000/month. It's a quick screening tool — many successful rentals don't pass the 1% rule, especially in higher-priced markets.

What is the BRRRR strategy?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property below market value, renovate it, rent it out, then do a cash-out refinance based on the new appraised value to pull out most or all of your original capital and repeat the process.

Where does CapRateCity get its data?

Our city-level data draws from publicly available sources including U.S. Census Bureau population and income figures, Zillow Home Value Index for median prices, HUD Fair Market Rents, and state/county tax assessor records. Data is updated periodically.

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Hard Money Loans: How They Work and When to Use Them

Short-term, asset-based financing that closes in days instead of months. Here's how hard money actually works, what it costs, and when it makes sense for an investor.

By NumbersLab · 9 min read

Hard money is the loan you take when a bank cannot move fast enough. It is not for buying a long-term rental — it is for buying a deal that needs to close this week, fixing it up, and getting out within 12 months. Used correctly, hard money turns capital into properties faster than any other tool. Used incorrectly, it eats every dollar of profit and then some.

This guide walks through how hard money loans actually work, what the real costs are, who they fit, and how to do the math before you sign.

What Is a Hard Money Loan?

A hard money loan is a short-term, asset-based loan funded by a private lender or specialty fund — not a bank. The loan is secured by the property itself, not by your income or credit history. If you default, the lender takes the property. That is why these loans are called "asset-based" — the asset is the underwriting.

Because hard money lenders take on more risk and skip the paperwork that conforming lenders require, they charge much higher rates and fees. The trade-off: speed and flexibility. A typical hard money loan closes in 5 to 14 days. A conventional loan takes 30 to 45.

Typical Terms in 2026

Interest rate

10% to 14% is the normal range. Stronger borrowers and lower-LTV deals get closer to 10%. New investors and risky rehabs pay 13% to 14%. Some lenders quote rates as low as 9% but make it back on points and fees.

Points

Lenders charge 1 to 3 points upfront — that is 1% to 3% of the loan amount, paid at closing. On a $200,000 loan, 2 points equals $4,000. This is in addition to the interest rate.

Loan term

6 to 18 months is standard. 12 months is the most common term. Extensions are usually available for an extra fee, but the lender expects you to be out by maturity. This is not a 30-year mortgage — it is a bridge.

LTV and LTC

Most hard money lenders cap loan-to-value at 70% to 75% of the after-repair value (ARV) or 80% to 90% of the loan-to-cost (LTC) including rehab. The math: if a property is worth $300,000 after repairs, a 70% ARV lender will lend up to $210,000 — which often covers both the purchase and most of the rehab.

Down payment

Effectively 10% to 30% of total project cost. Hard money is not 100% financing; you bring real cash to the table.

Watch the fees: Beyond rate and points, hard money lenders charge underwriting fees ($500-$1,500), document prep fees, draw fees on rehab funds, and inspection fees on each draw. Add them all up before comparing offers.

How Qualification Works

Hard money lenders are not banks. They do not pull your tax returns, calculate your DTI, or care about your W-2. What they care about is the deal. They want to see:

The property. An appraisal or broker price opinion (BPO) confirming current value and after-repair value. Comps in the neighborhood. The rehab scope and budget.

Your skin in the game. 10% to 30% down depending on lender and deal strength. Some lenders allow secondary financing or partner equity to reduce your personal cash needed.

Your experience. First-time flippers pay higher rates and lower LTVs. Experienced flippers with 5+ deals get the best terms. Lenders track your "track record" the same way banks track credit history.

Your exit strategy. The single most important question. How are you paying this loan back in 12 months? Refinance into a DSCR loan after BRRRR? Sell after a flip? Pay cash? No exit strategy, no loan. Read more in our DSCR loan guide if you are planning a refinance exit.

When Hard Money Makes Sense

Fix and flip

The original use case. You buy a distressed property, rehab it, and sell within 6 to 12 months. The high rate is offset by the short hold. On a 6-month flip, paying 12% interest is only 6% of the loan — totally absorbable on a deal with a 20%+ profit margin.

BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

Hard money funds the buy and rehab phase. Once the property is rented and seasoned (typically 6 months), you refinance into a long-term DSCR or conventional loan and pay off the hard money. Walk through the full strategy in our BRRRR strategy guide.

Auction and off-market deals

Foreclosure auctions and trustee sales require all-cash purchases that close in 24 to 72 hours. No conventional lender can fund that fast. Hard money is the only path for most investors.

Properties banks won't finance

Major structural issues, missing kitchens, fire damage, condemned status — banks will not lend on these. Hard money lenders will, because they underwrite to ARV and assume the rehab will fix the issues.

A Real Cost Example

You buy a $150,000 property that needs $40,000 in rehab and will be worth $250,000 after repairs. ARV-based hard money loan at 70% ARV: $175,000 loan. Rate 11%, 2 points, 12-month term.

Upfront points: 2% × $175,000 = $3,500.

Interest (12 months): 11% × $175,000 = $19,250 if held the full term. Most lenders charge interest only, monthly, so $1,604/mo.

Other fees: ~$2,000 (underwriting, doc prep, inspections).

Total cost of capital for 12 months: $24,750.

Now compare to a 6-month flip: interest drops to ~$9,625, points and fees stay the same, total cost of capital ~$15,125. Cut the hold time in half and you cut the carrying cost by almost 40%.

True cost of hard money = points + (interest rate × balance × months held / 12) + fees

Why Exit Strategy Is Everything

Hard money is unforgiving when things go wrong. A flip that takes 18 months instead of 6 burns six extra months of double-digit interest. A BRRRR refinance that gets denied because the appraisal came in low can leave you stuck on a balloon you cannot pay.

Always have two exits. If your primary exit is a refinance, your secondary should be a sale. If your primary is a sale, the secondary should be a long-term refinance to give you breathing room. Run both scenarios on a BRRRR calculator before you fund.

To see what your refinance payment will actually look like, run scenarios at mortgagemathlab.com at conservative rates. If you cannot afford the long-term mortgage, you cannot afford the hard money loan either.

Rule of thumb: If you cannot make the deal work at 13% interest and 3 points, you do not have a deal. Hard money should reveal weak deals, not rescue them.

Pros and Cons

Pros

Closes in 5 to 14 days. Asset-based — credit and income matter less. Funds rehab as well as purchase. Flexible terms negotiable on each deal. Works on properties banks reject.

Cons

Rates 2 to 3 times higher than conventional. Points and fees stack quickly. Short term creates pressure. Personal guarantee almost always required. Default consequences are severe and fast.

Run the numbers on a hard money BRRRR →

How to Find a Good Hard Money Lender

Local meetups and REIA groups are the best source — investors who have closed multiple deals know which lenders fund on time and which ghost you the day before closing. Ask for references and call them. Compare three to five lenders on every deal; rate and points vary surprisingly within the same market.

Shop on total cost, not just rate. A 10% rate with 4 points may cost more than a 12% rate with 1 point on a 6-month flip. Always run the all-in number.

Bottom line: Hard money is a tool, not a strategy. Use it to move fast on deals that have margin to absorb the cost, with a clear exit and a backup plan. Avoid it for long-term holds — that is what DSCR and conventional loans are for.

See how financing affects cash-on-cash →

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