Is a hard money loan worth it for your fix-and-flip project? The answer depends on your numbers. Hard money loans typically cost 9-12% interest plus 1-3 origination points, but their speed advantage of closing in 7-14 days can help you secure deals that conventional financing would miss. If your projected profit margin exceeds 15-20% after all carrying costs, hard money often makes sense. If margins are tighter, you may need alternative financing or a better deal.
This guide walks you through exactly how to evaluate whether a fix and flip loan makes financial sense for your specific project in California's competitive real estate market.
Understanding Hard Money Loans for Fix-and-Flip Projects
A hard money loan is a short-term, asset-based loan secured by real estate rather than your credit profile or income. Unlike conventional mortgages that focus on your debt-to-income ratio and employment history, hard money lenders primarily evaluate the property's value and your exit strategy.
This asset-first approach creates both the opportunity and the cost structure that defines hard money lending:
Why hard money exists for flippers:
- Traditional banks take 30-45 days to close and often won't finance distressed properties
- Sellers of flip-worthy properties typically need fast closings
- Banks require the property to meet certain habitability standards that fixer-uppers often fail
What you're paying for:
- Speed (7-14 day closings versus 30-45 days)
- Flexibility on property condition
- Less documentation and faster approvals
- Financing for properties banks won't touch
Hard Money Loan Costs: A Complete Breakdown
Understanding your true cost of capital is essential for accurate ROI projections. Here's what California investors typically pay in 2026:
Interest Rates
Current hard money rates for fix-and-flip projects range from 9% to 12%, with the average hovering around 10.5%. Your actual rate depends on several factors:
- Credit score: Borrowers with 680+ scores often qualify for rates at the lower end
- Experience level: First-time flippers pay 1-2% more than experienced investors
- Loan-to-value ratio: Lower LTV means lower risk, which translates to better rates
- Property location: Prime California markets may command better terms
Note: Some lenders advertise rates as low as 7.5%, but these typically require exceptional credit, significant experience, and lower leverage.
Origination Points and Fees
Beyond the interest rate, expect to pay:
- Origination points: 1-3 points (1-3% of loan amount)
- Processing/underwriting fees: $500-$1,500
- Appraisal costs: $400-$800
- Title and escrow fees: Varies by county, typically $1,500-$3,000
Example on a $500,000 loan:
- 2 points origination = $10,000
- Processing fees = $1,000
- Appraisal = $600
- Title/escrow = $2,000
- Total upfront costs: approximately $13,600
Loan Terms and Duration
Most fix-and-flip hard money loans have terms of 6-18 months, with 12 months being standard. Key term considerations:
- Interest-only payments: Standard for hard money, keeping monthly payments lower
- Prepayment penalties: Some lenders charge penalties for early payoff; others don't
- Extension options: Many lenders offer 3-6 month extensions for a fee (typically 0.5-1 point)
The Speed Advantage: When Time Equals Money
The primary value proposition of hard money is speed. Here's how it translates to real competitive advantage:
Closing Timeline Comparison
| Financing Type | Typical Closing Time |
|---|---|
| Hard money | 7-14 days |
| Conventional mortgage | 30-45 days |
| Portfolio lender | 21-30 days |
| HELOC (existing) | Same day to 1 week |
Why Speed Matters in California
California's competitive real estate market often rewards fast closers:
- Multiple offer situations: Sellers favor buyers who can close quickly
- Distressed property auctions: Often require 7-14 day closings
- Wholesale deals: Best deals go to investors who can move fast
- Relationship building: Being known as a fast closer brings you deals first
Illustrative Example - Los Angeles County Flip:
The following scenario is hypothetical and provided for educational purposes only.
An investor identifies a property in Pasadena listed at $650,000. The seller is motivated and has already had two buyers fall out of escrow due to financing delays. The property needs $80,000 in renovations and has an ARV of $875,000.
With hard money, the investor closes in 10 days, securing the property before competing offers arrive. A conventional buyer's 45-day timeline would have given competitors time to submit offers, potentially driving up the price or losing the deal entirely.
ARV Calculations: The Foundation of Every Flip Decision
After Repair Value (ARV) is the projected market value of the property once renovations are complete. This number drives every decision in your flip, including whether hard money makes sense.
How to Calculate ARV
- Pull comparable sales: Find 3-5 properties similar to your post-renovation vision
- Adjust for differences: Account for square footage, lot size, features, and location
- Be conservative: Use the middle of your comp range, not the top
- Factor in market timing: If your flip takes 6 months, consider market trajectory
The 70% Rule
A foundational guideline for flip investors:
Maximum Purchase Price = (ARV x 0.70) - Repair Costs
This rule builds in margin for your profit, holding costs, and unexpected expenses.
Example:
- ARV: $800,000
- Repair costs: $100,000
- Maximum purchase price: ($800,000 x 0.70) - $100,000 = $460,000
California-Specific ARV Considerations
California's diverse markets require careful ARV analysis:
- Micro-markets matter: Values can vary significantly within a few blocks
- Permit history: Unpermitted work affects ARV differently in different cities
- ADU potential: Accessory dwelling unit possibilities can significantly impact value
- Climate considerations: Pool, solar, and drought-resistant landscaping affect values regionally
ROI Calculation: A Complete Example
Let's walk through a detailed ROI analysis to determine if hard money makes sense for a hypothetical California flip.
Illustrative Scenario: Orange County Fixer-Upper
This example is hypothetical and for educational purposes only. Actual returns vary based on market conditions, renovation costs, and sale timing.
Deal Parameters:
- Purchase price: $550,000
- Renovation budget: $75,000
- ARV: $750,000
- Timeline: 5 months (acquisition to sale)
Hard Money Loan Terms:
- Loan amount: $500,000 (90% of purchase + rehab draws)
- Interest rate: 10.5%
- Origination: 2 points ($10,000)
- Closing costs: $4,000
Cost Breakdown:
| Cost Category | Amount |
|---|---|
| Down payment (10% of purchase) | $55,000 |
| Renovation costs | $75,000 |
| Loan origination (2 points) | $10,000 |
| Closing costs (purchase) | $4,000 |
| Interest (5 months at 10.5% on $500K) | $21,875 |
| Property taxes (5 months) | $2,865 |
| Insurance (5 months) | $1,000 |
| Utilities (5 months) | $750 |
| Selling costs (6% commission + closing) | $48,000 |
| Total Costs | $218,490 |
Profit Calculation:
- Sale price: $750,000
- Total investment: $550,000 + $75,000 = $625,000
- Total costs (including interest, fees, selling): $218,490
- Cash invested: $55,000 + $75,000 = $130,000
Gross Profit: $750,000 - $625,000 - $93,490 (carrying + selling costs) = $31,510
Cash-on-Cash Return: $31,510 / $130,000 = 24.2%
Annualized ROI: 24.2% x (12/5) = 58.1%
When This Deal Works
This scenario works because:
- The 24% cash-on-cash return exceeds the 15-20% minimum threshold
- Speed of hard money enables capturing the deal
- The spread between purchase and ARV is sufficient to absorb costs
When This Deal Doesn't Work
If the numbers were tighter (say, ARV of $700,000 instead of $750,000), the profit drops to approximately $6,500, making the risk-reward unfavorable. In that case, you would need either a lower purchase price or alternative financing.
Exit Strategy: The Most Important Factor
Hard money lenders care deeply about your exit strategy because their loan is short-term. You need a clear, realistic plan for paying off the loan.
Primary Exit Strategies
1. Sell the Property (Most Common)
- Timeline: 3-6 months after renovation
- Risk: Market conditions, pricing accuracy
- Consideration: Factor in realistic days-on-market for your area
2. Refinance to Long-Term Financing
- Transition to a conventional loan or DSCR loan
- Requires property to appraise at new value
- Useful if you want to hold as a rental
3. Cash-Out from Another Source
- Use proceeds from another sale
- Access other investment accounts
- Partner buyout arrangements
Exit Strategy Red Flags
Avoid hard money if:
- Your only exit depends on appreciation (speculation)
- The property needs more time to stabilize than your loan term allows
- You don't have a backup plan if the primary exit fails
Alternatives to Hard Money for Fix-and-Flip
Hard money isn't the only option. Compare these alternatives:
DSCR Loans (Debt Service Coverage Ratio)
- Best for: Investors planning to hold the property as a rental after renovation
- Rates: 7-9%
- Terms: 30-year fixed available
- Downside: Slower closing (21-30 days), property must cash flow
Home Equity Line of Credit (HELOC)
- Best for: Investors with significant equity in their primary residence
- Rates: Prime + 1-2% (currently 8-10%)
- Advantage: No origination points, interest only on amount used
- Downside: Puts your home at risk, limited to available equity
Private Money from Individuals
- Best for: Investors with personal networks of high-net-worth individuals
- Rates: Negotiable, often 8-12%
- Advantage: Flexible terms, relationship-based
- Downside: Requires building relationships, variable availability
Portfolio Lenders
- Best for: Investors with banking relationships
- Rates: 7-9%
- Advantage: More competitive rates than hard money
- Downside: Slower closing, stricter requirements
California-Specific Considerations
Investing in California fix-and-flips comes with unique factors:
Licensing Requirements
California hard money lenders must be licensed by either:
- California Department of Real Estate (DRE)
- California Department of Financial Protection and Innovation (DFPI)
Always verify your lender's licensing status before proceeding.
Property Value Considerations
California's high property values mean:
- Larger loan amounts increase absolute dollar cost of points and interest
- Higher stakes require more precise ARV calculations
- Greater profit potential but also larger losses if deals go wrong
Permit and Code Requirements
California cities vary significantly in permit requirements and code enforcement:
- Los Angeles has strict retrofit requirements
- Coastal cities have additional environmental reviews
- ADU regulations create opportunities but add complexity
Market Timing
California's cyclical market requires awareness of:
- Interest rate impacts on buyer purchasing power
- Seasonal buying patterns (spring/summer typically stronger)
- Local employment and population trends
Making Your Decision: Is Hard Money Right for You?
Use this framework to evaluate your specific situation:
Hard Money Makes Sense When:
- Your deal has 20%+ projected profit margin after all costs
- Speed is essential to secure the property
- The property doesn't qualify for conventional financing
- You have a clear, executable exit strategy
- You've accurately calculated ARV with conservative comps
Consider Alternatives When:
- Profit margins are below 15%
- You have time for conventional financing
- You have access to cheaper capital (HELOC, private money)
- You plan to hold the property long-term
- The deal depends on appreciation rather than forced equity
Questions to Ask Yourself:
- What is my total cost of capital including all fees?
- Have I verified ARV with recent comparable sales?
- What is my backup exit strategy?
- Can I cover payments if the project takes longer than expected?
- Is my renovation budget realistic with contingency built in?
Next Steps
If you're considering a fix and flip loan for a California investment property, the most important step is running your numbers with accurate, current data. Every deal is different, and what works in one market or price point may not work in another.
For a personalized analysis of your specific fix-and-flip project, including current rate quotes and term structures, contact us for a consultation. We can help you evaluate whether hard money, a DSCR loan, or another financing structure best fits your investment strategy.
Last verified: January 2026
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Investment returns are not guaranteed, and real estate investing involves risk of loss. The examples provided are hypothetical illustrations and actual results will vary. Always consult with qualified financial and legal professionals before making investment decisions.