Hard money and traditional financing (sometimes called soft money) are not rivals: each one has its place in commercial real estate.
The right choice depends on your situation. Are you:
- Buying a property that needs major repairs?
- Trying to close before another buyer puts the property under contract?
- Planning to hold the asset and/or use it as your own business premises for years?
Your answer will change which financing route makes sense.
In this guide, we’ll walk through both options and show you how to match the loan to the deal you’re looking to execute.
What is the basic difference between hard money and traditional financing (soft money)?
To put it simply, they solve different CRE problems. One is not necessarily “better.”
Hard money loans are short-term CRE loans funded by private lenders such as individual investors and investment groups.
The property you want to buy or refinance will secure the loan, so the lender will pay close attention to its condition and value, as well as your exit plan.
This type of financing is especially useful if you need to fund a deal fast and/or want to fix it before eventually pursuing bank financing.
Traditional CRE loans, meanwhile, usually come from banks and credit unions or institutional lenders such as life insurance companies and CMBS lenders.
It’s generally designed for borrowers with strong financials looking to finance properties that already meet conventional lending standards.
Lenders in this category will usually take a deeper look at your personal credit profile and income history. It’s not enough that the property can support the loan. You yourself have to qualify as a borrower.
The basic tradeoff is that hard money usually costs more, but it is approved faster and can be used to fund properties that banks will not approve.
Traditional financing usually costs less, but approval takes much longer, and both you (as the borrower) and the property have to meet stricter requirements.
That means you can’t choose based on rate alone. A cheaper traditional loan will only be useful if you can actually get it for the property you want to finance and on the timeline the opportunity allows.
When is hard money a sensible financing option?
1. If you need to close quickly
Bank loans are notoriously slow, taking months to get approved, especially for commercial real estate.
There’s a long list of internal processes: the lender may need committee review, property-level underwriting, third-party reports, additional documentation, and many other sign-offs before finally closing.
That’s all fine if the seller can wait, but not if you’re working against the clock in competitive and/or time-sensitive situations like:
- auction purchases
- discounted acquisitions
- distressed properties
- foreclosure deadlines
- maturing debt payoffs
Hard money can give you a way to close while the opportunity is still available, but of course, speed by itself is not valuable: the deal still needs to make financial sense, meaning the upside has to be large enough to absorb the higher cost.
2. If the property needs major repairs
Banks and other traditional lenders often hesitate to fund commercial properties that have serious problems:
- deferred maintenance
- low occupancy
- inconsistent income
- unresolved code issues
Many conservative lenders don’t underwrite future potential.
They only lend against how it’s performing today, so they may reject your loan application even if the property can clearly become bankable after repairs and lease-up.
Hard money lenders who specialize in commercial real estate are often much more comfortable with these types of situations because they understand how to analyze transitional assets. If you can present them with a solid improvement plan, they may be willing to fund the acquisition.
3. If your credit is weak
Is your personal credit profile not strong enough for a traditional loan because you’ve had liens or because, as a self-employed investor, your financials are hard to document?
Hard money lenders are not as concerned about tax-return income as banks are, so they will likely still consider the deal if the property has enough value.
This is especially true if your background and experience in CRE are solid, as that will give them the confidence that you can complete the project.
4. If you’re buying at auction
Even if the bank likes the property, they might not be able to process the loan fast enough to meet the deadline.
Traditional lenders know that auction properties tend to come with hidden issues, so they might be extra cautious in underwriting.
Hard money can cover the purchase window and allow you to take control of the property, and then refinance once the asset is bankable.
When might traditional loans be better?
1. If you plan to own and/or occupy the property long term
The lower rates of traditional financing can dramatically reduce your monthly debt-service burden if you plan to hold the asset for years.
That’s because even a small rate difference can have a major effect on your cash flow when you’re paying a loan over decades.
Are you buying a building for your own business or adding a stabilized asset to your portfolio? Traditional financing gives you more predictable payments, so the property is easier to budget around.
2. If the deal needs cheap debt
After you add the interest, points, closing costs, and holding costs, does the deal still leave enough profit or income to justify the price of a hard money loan?
If not, then it may be better to wait for approval from a bank. Traditional financing may be slower, but the lower cost can protect the deal’s return.
Questions to ask before you decide
- How soon do I need to close?
- Can the property qualify for bank financing today?
- Would a slower approval process put the deal at risk?
- How much work does the property need before a bank would finance it?
- Will the deal still produce enough return after hard money interest and points?
- How long will I need the loan before I can sell or refinance?
- What is my payoff plan?
- What happens if that payoff takes longer than expected?
If you’re leaning towards hard money and want to explore financing in the $2 million to $50 million range, talk to our team here at Private Capital Investors. We can fund qualified deals in as fast as two weeks.
