There’s a very common misconception in commercial real estate that hard money loans are always worse than bank loans.
It’s true that traditional banks do offer higher stated LTV percentages. You might get 80% when you talk to a bank and only 65% when you take the same deal to a hard money lender.
But in many cases, hard money lenders calculate LTV using a much higher property valuation. As a result, you’ll often end up getting more actual cash from a hard money lender than from a bank.
This is especially true when it comes to buying discounted or distressed properties, because banks tend to be wary of properties that need major work.
Hard money lenders understand the mechanics of commercial real estate, so they understand value-add deals and can evaluate what the asset could be worth after improvements, in contrast.
Valuation logic: Banks vs. hard money lenders
Banks and hard money lenders are inherently different in the way they value collateral. They can look at the exact same property and arrive at a loan amount using completely different math rules.
Traditional banks are highly regulated entities, so they have less room to depart from standardized underwriting.
By law, they must base their LTV on the lesser of either the purchase price or the current appraised value.
This means that if you find a great deal on a property, the bank essentially penalizes your loan size by capping it to your low purchase price.
Hard money lenders in commercial real estate are private entities that are not under the strict supervisory limits that banks work under. They can choose their own valuation method.
Most CRE hard money lenders use the higher appraised value, or even the after-repair value if you plan to renovate the property you’re taking out the loan for.
They’re basing the loan on what the property is actually worth (or will be worth) and not just how much you paid for it.
Let’s say that the property you want to finance has an appraised as-is value of $5,000,000 and a discounted purchase price of $4,000,000.
| Lender | Stated LTV | Valuation Basis | Calculation | Actual Loan Amount |
|---|---|---|---|---|
| Traditional Bank | 80% (Looks better) | Purchase Price (Lesser) | $4,000,000 × 80% | $3,200,000 |
| Hard Money Lender | 65% (Looks worse) | Appraised Value (Higher) | $5,000,000 × 65% | $3,250,000 |
As you can see here, even though the bank’s LTV sounds higher (80%), the hard money lender (65%) gives you $50,000 more cash upfront because they base their math on the $5,000,000 valuation rather than the $4,000,000 purchase price.
Another advantage to using hard money is that most of these loans only require you to pay the interest each month during the loan term, which lasts 6 months to 3 years.
That structure allows you to push more cash toward the renovation and/or repositioning.
And no, the interest rates charged by banks and by hard money lenders aren’t as far apart as you might think.
While it’s true that hard money rates are higher, reputable private lenders stay reasonably competitive with long-term commercial investment mortgage rates.
Related blog: Should you use hard money to finance a rental property?
Do hard money LTV ratios vary based on the type of commercial property project?
Hard money lenders change their max LTV based on how risky the project is to build or sell.
And because some types of projects are considered to be riskier, the lender may finance a smaller share of the project and you may be asked to bring in more equity.
| Project Type | Typical Max LTV | Why Lenders Set This Limit |
|---|---|---|
| Fix-and-Flip | 70% – 75% | Higher LTV allowed because flips tend to be fast. The ceiling can edge up if your planned renovations are mostly cosmetic/straightforward and can add quick equity/value. |
| Bridge Loans | 65% – 70% | Moderate LTV because these are short-term placeholders while waiting for permanent financing/a buyer. |
| New Construction | 60% – 65% | Lowest LTV (strict limit) because building from scratch is much riskier. There’s always the possibility that permits may be delayed. Cost overruns and contractor issues are also hard to rule out. |
Lenders tend to reward low-risk deals, so a 60% LTV loan will often qualify for a lower interest rate than a 75% LTV loan because the lender can sell the property at a deeper discount and still recover the debt if you default on payments.
But that’s not all there is to it. Pricing is also affected by the type of property you want to finance and your overall experience as a borrower.
Hard money lenders will likewise look at how executable your exit strategy is.
Note that even if you ask for a conservative/low LTV, the hard money lender is still going to charge you their standard origination fee, which is often 2% to 5% of the loan amount (called “points”).
Do hard money lenders ever cover 100% of a purchase?
Yes, but very rarely. This is uncommon in commercial real estate. A hard money lender may finance 100% of the purchase price if the property is being bought well below its appraised value.
What happens if my requested LTV exceeds a lender’s maximum?
The lender may reduce the loan amount or decline the deal outright. To fix this, you could try to offer the lender a lien on another piece of property you already own (additional collateral). This is called cross-collateralization.
But not all hard money lenders are set up or willing to handle loans backed by multiple properties.
How can you get more favorable hard money terms?
You can bring more equity. Putting down a larger down payment will pull the LTV and interest rates lower. It can also make approval easier.
Your effective LTV will also improve if you buy at a discount.
Because hard money lenders base their loan limits on the property’s value rather than your discounted purchase price, the math automatically makes the loan look low risk to the lender.
But perhaps the single best thing you can do is work with a hard money lender that understands your specific market.
Different private lenders calculate LTV differently. The same property may qualify for different terms depending on who evaluates it.
Tell us about your deal here at Private Capital Investors.
