Hard money or commercial loan?

The question underneath the question

Borrowers almost never call and ask for the right product by name, and they should not have to. What they say is “I need to close in two weeks,” or “my bank wants forty-five days and a personal financial statement,” or “the building is half empty and nobody will touch it.” Each of those is an answer to a question they did not know they were being asked.

The question is this: does the property, today, produce the income that supports permanent debt?

If the answer is yes, you are shopping for a commercial loan, and you should shop it properly, because rate and term are worth real money over a ten year hold.

If the answer is no, because the property is being renovated, built, repositioned, leased up or simply bought faster than a bank can move, then you are in hard money, and what you are buying is certainty of execution.

Everything else in this article is elaboration on that one distinction.

What hard money actually is

Hard money is short term real estate debt underwritten primarily on the asset. Three inputs decide it: what the property is worth today, what it will be worth once the plan is executed, and how the loan gets repaid. Your tax returns are not part of that calculation. There is no debt-to-income ratio, no employment verification, and on most programs no income documentation at all.

What that buys is flexibility about condition and a shorter path. A vacant house with a failed roof is uninsurable and unfinanceable at a bank. It is a normal Tuesday for a private lender.

What it costs is rate. Hard money prices meaningfully above conventional debt, because the lender is taking condition risk, execution risk and sponsor risk on a compressed timeline. That is a fair trade for twelve months. It is a terrible trade for five years, which is why every well structured bridge loan is underwritten to a specific exit before it funds.

What a commercial loan is

A commercial mortgage is longer-term debt underwritten on the property’s stabilized income and the sponsor’s balance sheet. The lender is asking a different question: will this asset still be throwing off enough cash to cover debt service in year ten?

That produces a different process. Rent roll, trailing twelve months of operating statements, a pro forma, a personal financial statement, a schedule of real estate owned, third-party reports including appraisal, environmental and often a property condition assessment. Thirty to ninety days depending on the program: bank and bridge at the fast end, agency and SBA at the slow end, HUD slower still.

And it produces a materially better loan: lower rate, longer amortization, often non recourse, often with an interest only period. For a stabilized asset you intend to hold, that difference is not a rounding error. On a $3MM loan, 150 basis points is $45,000 a year.

Sorting your own deal in thirty seconds

Run your deal against these. If any of the left column is true, you are in hard money. If the right column describes you, shop it.

Most deals land cleanly on one side. The ones that do not are usually a two-step: hard money now, permanent debt later, with the takeout underwritten at the front so the second step is arithmetic rather than hope.

The expensive mistake in each direction

Using hard money on a stabilized asset. It happens when a borrower is in a hurry, or when a broker only has one product to sell. A stabilized fourplex on a twelve month bridge note at bridge pricing is burning money for no reason, and a year later the borrower is refinancing anyway, paying two sets of closing costs to get where one would have taken them.

Trying to force a transitional asset into a bank. This wastes more than money; it wastes the option. Sixty days into a bank process on a half-leased building, the borrower learns the deal was never in the box, and the purchase contract has expired. The bank was never going to be wrong about occupancy. The timing was the mistake.

The structure that solves most of it

For a transitional asset, the right answer is usually both products in sequence:

• Bridge or rehab loan funds the acquisition and the capital plan.
• You execute: renovate, lease up, season the rent roll.
• Permanent debt takes it out: a DSCR loan on 1 to 4 units, agency debt at five units and up, a bank or SBA loan on owner occupied commercial.

The part that matters is doing step three’s arithmetic during step one. Size the takeout at conservative assumptions, softer rents, longer lease up, a wider exit cap, before you sign the bridge note. If the permanent loan does not cover the bridge under stress, the deal needs more equity or a different plan, and it is far cheaper to learn that now.

What to do with this

You do not have to diagnose your own deal. That is the job. Our four routing questions sort it in about forty seconds, and if it genuinely sits on the line we price it both ways, what we would fund off our own balance sheet against what the institutional market would quote, and you pick.