Flipping a house for the first time can feel like learning a new language. Two terms you will hear early on are "hard money" and "private money." They both provide fast capital outside of a traditional bank, but they work very differently. Understanding those differences before you sign anything can save you time, money, and a lot of stress.
This guide breaks down what each option is, how they compare on cost and speed, and what to watch out for as a beginner. It ends with a quick look at how to run the numbers on your own deal.
What Is Hard Money?
Hard money loans are provided by companies or funds that specialize in real estate lending. These lenders focus on the property itself rather than your personal income or credit score. If the numbers work—typically the after-repair value (ARV) and the repair budget—they will lend.
Key characteristics:
- Speed: Closings can happen in 5 to 10 days. That speed is the main reason flippers use hard money.
- Terms: Most hard money loans are short-term, usually 6 to 18 months. They are not meant to be long-term mortgages.
- Cost: Interest rates are higher than bank loans, often ranging from 8% to 15% annually. There is also usually an origination fee, typically 1% to 3% of the loan amount, paid at closing.
- Underwriting: The lender orders an appraisal or uses a broker price opinion (BPO) to determine the property's value. They lend based on a percentage of the current value or the projected ARV.
- Repayment: You make monthly interest payments, and the principal is due in a lump sum when you sell the property or refinance into a conventional loan.
What Is Private Money?
Private money comes from individuals—often people in your own network. This could be a family member, a friend, a business associate, or someone you meet through a local real estate investment club. Because there is no middleman, the terms are flexible.
Key characteristics:
- Flexibility: You and the lender agree on the rate, schedule, and repayment structure. Some private lenders want monthly interest payments; others prefer to wait until the property sells.
- Speed: Like hard money, private money can close quickly. However, because you are negotiating with a person, the timeline depends on how fast you both agree on paper.
- Cost: Rates vary widely. A private lender might accept 6% or they might ask for 12%, depending on the relationship and the risk. There are no standard origination fees unless you agree to them.
- Underwriting: Private lenders often trust your underwriting more than a hard money underwriter would. If you present a solid plan, they may lend based on that alone.
- Relationship: This is the biggest difference. Private money relies on trust. If you miss a payment or the flip takes longer than expected, the personal relationship can suffer.
Side-by-Side Comparison
| Feature | Hard Money | Private Money |
|---|---|---|
| Source | Lending companies or funds | Individuals (family, friends, clubs) |
| Focus | Property value and numbers | Relationship and trust |
| Typical Term | 6–18 months | Flexible, often match the project |
| Interest Rate | 8%–15% (set by lender) | 6%–12%+ (negotiated) |
| Fees | Origination fee common | Usually none, but negotiable |
| Approval Speed | 5–15 days | 1–10 days (depends on people) |
| Credit Check | Rare; focus on collateral | Varies by lender |
| Best For... | Quick closings, standard flips | Network-rich flips, creative terms |
A Worked Example
Let’s look at a hypothetical deal to see how the numbers differ. Example: You find a property under contract for $100,000. You estimate $30,000 in repairs. The neighborhood comps suggest an ARV of $200,000.
A hard money lender might offer you 70% of the ARV, minus repairs. That is $140,000 (70% of $200,000) minus $30,000, leaving you a loan amount of $110,000. You would pay interest, likely around 10% annually, and a 2% origination fee ($2,200). Your monthly interest payment would be about $917.
A private lender in your network might lend you the full $130,000 needed (purchase + repairs) based on your reputation and the plan you present. They might charge 9% interest with no origination fee. Because it is a personal relationship, they might allow interest-only payments monthly, with the full $130,000 due when you sell.
In both scenarios, you are using someone else's capital. The difference is who provides it and how the costs are structured.
Repair and Rehab Cost Estimating
One of the most common mistakes beginners make is underestimating repair costs. Both hard money and private lenders will look at your repair budget closely. If you ask for $30,000 and the actual work ends up being $45,000, you will have to cover the difference yourself—or ask for more money, which delays the project.
Tips for a solid repair budget:
- Walk the property yourself. Don’t rely solely on photos.
- Get at least three contractor bids for major items (roof, HVAC, kitchen, bath).
- Add a 10% to 20% contingency line item for surprises. Old houses almost always have something unexpected—mold, outdated wiring, foundation issues.
- Use a [renovation calculator](/tools/renovation) to organize your room-by-room costs before you approach any lender.
The 70% Rule
You will often hear about the "70% rule" when talking to hard money lenders. It is a quick way to estimate the maximum price you should pay for a property.
The rule: Maximum purchase price = (ARV × 0.70) – Estimated repair costs.
Example: If the ARV is $200,000, 70% of that is $140,000. If repairs are $30,000, your max purchase price would be $110,000.
Hard money lenders use this rule to protect themselves. If you buy too high, there is less room for profit if the market shifts or repairs take longer. Private money lenders may not quote the 70% rule exactly, but they will still want to see that the numbers work. Either way, know your ARV and your repair budget before you talk money.
Holding Costs and Closing Costs
Flipping a house is not just the purchase price and the rehab. You will also have costs while you own the property. These are called "holding costs."
Permits and Local Rules
Every city and county has its own set of rules for renovations. Before you start tearing out walls, check what permits are required. A kitchen gut job usually needs a permit. So does adding a bathroom or moving electrical lines. Failing to pull permits can result in fines, and in some cases, you may be forced to undo work you’ve already done.
Taxes on Flip Profits
When you sell a flipped property, the profit is generally taxed as ordinary income, not as long-term capital gains. That means your profit is added to your other income and taxed at your marginal tax rate. If you flip frequently, the IRS may view you as a dealer rather than an investor, which changes the tax treatment further.
Risks and Common Mistakes
Every flip carries risk. Here are a few that are especially relevant when using outside capital:
Which Should You Use as a First Flipper?
There is no universal answer, but here are some questions to help you decide:
Using the Calculators
Before you commit to any lender, run your own numbers. FlipRadar offers free tools to help you estimate costs, analyze the 70% rule, and project your potential profit. You can start with the [after-repair value calculator](/tools/arv) to determine your ARV, then use the [flip profit calculator](/tools/flip-profit) to see your estimated net after all costs. These tools are free to use and require only the basic numbers you already know about your deal.
Frequently Asked Questions
Flipping houses can be a rewarding way to build wealth, but it carries financial risk. This guide is for educational purposes only and is not financial, legal, or tax advice. No guarantees of profit are made. Always consult with qualified professionals before making investment decisions.
[Calculate your flip numbers](/tools/flip-profit) today and see what your deal could look like.