Wisconsin Discount Properties

Choosing the Right Financing Route: Hard Money vs. Commercial Lending

Compare Hard Money vs Commercial—adjust the fields below to see costs and cash needed in real time. Continue below for a full analysis from our case studies.

No closing costs in this mini. Financing Cost = interest-only (plus origination fees). Money out of pocket required = Purchase + Rehab − lender funds (min $0).
Commercial 85% PP/Rehab • 8% IO • $2.4k orig • Cap 80% ARV
Financing Cost (flip phase)this is the amount it costs to borrow money from the lender
$0
Money out of pocket required
$0
Capped to 80% of ARV
Hard Money 65% ARV • 12% IO • 3% orig
Financing Cost (flip phase)this is the amount it costs to borrow money from the lender
$0
Money out of pocket required
$0
1024 Rockdale St
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Flip

1024 Rockdale St

Feb 2024

Winning Offer: $152,222
Rehab Costs: $41,000
Financing Costs: $17,000
Sold on MLS Price: $265,000
All-In Cost: $197,247
Profit (after all expenses): $57,153
124 Elm Ave
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Flip

124 Elm Ave

Jan 2025

Winning Offer: $117,100
Rehab Costs: $17,000
Financing Costs: $4,000
Sold on MLS Price: $215,000
All-In Cost: $140,600
Profit (after all expenses): $62,644

1024 Rockdale Example

Hard Money Financing Commercial Financing
Loan Amount 65% of ARV = $156,000 85% of Purchase = $129,388.70
85% of Rehab = $34,850
Total Loan: $164,238.70
Interest Rate 12% 8.5%
Origination Fee 3% of loan = $4,680 $2,300 (includes closing costs, appraisal, title fees)
Monthly Payment $1,950 (12% of $156,000 ÷ 12) $1,166.68 (8.5% of $164,238.70 ÷ 12)
Total Financing Cost (6 months) Interest: $11,700
Origination Fee: $4,680
Total Cost: $16,380		 Interest: $7,798.75
Origination Fee + Costs: $2,300
Total Cost: $10,098.75
Investor's Money Required $193,222 (purchase + rehab)
Loan: $156,000
Investor's Cash to Bring: $37,222		 $193,222 (purchase + rehab)
Loan: $164,238.70
Investor's Cash to Bring: $28,983.30

Why Use Commercial Financing for 1024 Rockdale St?

For larger projects like 1024 Rockdale St, Commercial Financing is usually the best route. Here’s why:

  • Lower interest rates and origination costs: Commercial lenders typically charge lower fees, which can save you money upfront.
  • Higher loan-to-value (LTV): Commercial lenders often lend a higher percentage of the purchase price and rehab, reducing the amount of money you need to bring to the table.
  • More time to close: For larger projects like this, you can utilize a longer-term loan (6 to 12 months) if needed, giving you the flexibility to complete your rehab without rushing.

Note for Commercial Financing: Although Hard Money is often associated with requiring less out-of-pocket costs, in this case, the investor using Commercial Financing had lower upfront costs because commercial lenders lend up to 80% of ARV. Additionally, the person who used Commercial Financing saved money in the long term due to lower interest rates and better terms.

124 Elm Example

Hard Money Financing Commercial Financing
Loan Amount 65% of ARV = $130,000 85% of Purchase = $99,535
85% of Rehab = $14,450
Total Loan: $113,985
Interest Rate 12% 8.5%
Origination Fee 3% of loan = $3,900 $2,300 (includes closing costs, appraisal, title fees)
Monthly Payment $1,300 (12% of $130,000 ÷ 12) $805.94 (8.5% of $113,985 ÷ 12)
Total Financing Cost (6 months) Interest: $15,600
Origination Fee: $3,900
Total Cost: $19,500		 Interest: $4,848.73
Origination Fee + Costs: $2,300
Total Cost: $7,148.73
Investor's Money Required $134,100 (purchase + rehab)
Loan: $130,000
Investor's Cash to Bring: $4,100		 $134,100 (purchase + rehab)
Loan: $113,985
Investor's Cash to Bring: $20,115

When to Use Hard Money Financing for 124 Elm Ave?

While Commercial Financing is great for larger, long-term projects like 1024 Rockdale St, Hard Money Financing might be a better option for properties like 124 Elm Ave. Here’s why:

  • Lower upfront cash requirements: Hard Money typically requires less cash upfront, which can be especially useful if you're trying to keep your investment capital low for smaller projects.
  • Quick closing: If you're in a situation where time is of the essence and you need to close quickly, Hard Money Financing is ideal.
  • Backup option: If other lending options fall through, Hard Money can be a great backup, allowing you to proceed with your project without delay.

Note for Hard Money Financing: Even though Commercial Financing typically requires a higher down payment, Hard Money still might be the right choice here, especially when you need to close fast. Even though you have to put more money down for Commercial Financing, Hard Money is faster and more flexible in some situations. However, if you're looking at the total financing cost, Commercial Financing may still be the better long-term choice.

So, What’s the Difference Between Hard Money and Commercial Lending?

When to Use Commercial Financing
  • Properties where you have more time to close.
  • More expensive properties.
  • When you have access to funds for a down payment.
  • Larger projects that may need a longer-term loan.
  • If you have a HELOC (Home Equity Line of Credit) available for the down payment.
When to Use Hard Money Financing
  • A backup option if other lending options fall through.
  • Quick closings when time is of the essence.
  • New investors who want a more seamless buying process.
  • When the purchase price + rehab are covered by the % of ARV the lender will lend (don't need to put any of your own money in the deal).

Moral of the Story

Hard Money Financing is an excellent quick fix for new investors or those working on time-sensitive projects. It helps you get deals closed quickly but comes with a higher price tag. On the other hand, Commercial Financing is the better long-term option for serious investors. It offers lower interest rates, longer loan terms, and the potential to build a relationship with your lender, ultimately helping you save money in the future.

In the end, Hard Money is great for quick deals, while Commercial Financing is better for those looking to save money over time and build a relationship with a lender for better financing options.