Most hard money lenders think they’re fix-and-flip lenders. I thought that too. Then I looked at our actual loan portfolio and realized 60% of our transactions are refinances. That’s not a fluke. It’s what happens at scale and as you continue to grow your hard money lending company. After 18 years of lending through multiple market cycles at Hard Money Bankers, here’s a breakdown of the 3 loan types that actually drive our volume. The third one is the most UNDERSERVED niche in private lending today.
Key Takeaways
- Fix-and-flip / purchase and construction loans are what most lenders think they do exclusively. They’re only part of the picture. Acquisition plus rehab holdback is the core structure.
- Residential bridge loans (refinances, cash-out on rentals, acquisition-only) make up about 60% of our volume. Most lenders don’t realize how much of this deal flow is sitting in front of them.
- Small balance commercial (multifamily, office, retail, storage, flex space under $2M) is the most underserved niche in private lending. Banks won’t touch it. Institutional lenders won’t either. That’s your opportunity.
- All three product types come from the same marketing channels. You don’t need a separate campaign for each one.
- As a lender, your job is risk mitigation first. Yield is a byproduct of doing that well.
In This Article
- Fix-and-Flip / Purchase and Construction Loans
- Residential Bridge Loans
- Small Balance Commercial Loans
- What Stays the Same Across All 3 Products
- Frequently Asked Questions
Fix-and-Flip / Purchase and Construction Loans
Fix-and-flip is the product most people think of when they hear “hard money.” A real estate investor buys a distressed property, renovates it, and sells it. Usually within 6 to 12 months. You provide short-term bridge financing secured by the property. It’s the FOUNDATION of how most lenders get started, and it’s legitimate volume.
There’s more nuance inside this category than most lenders acknowledge. About 15% of our purchase transactions involve a construction holdback. The borrower is buying AND renovating. Another 28% are straight purchase money with no rehab component. When I say “fix-and-flip,” I mean the full range of residential acquisition deals. Light cosmetic flips to full gut rehabs. The deal structure is what changes, not the product category.
The underlying flip market has been cooling. Per ATTOM’s most recent data, the typical profit margin on a flipped home has dropped below 25%. That’s the weakest reading since 2008. Borrowers are operating on thinner cushions than they were 3 years ago. That’s not a reason to stop lending on flips. It’s a reason to underwrite harder.
How to Underwrite Fix-and-Flip Deals as a Lender
I base ARV on the three lowest-priced active listings AND the three lowest-priced comparable recent sales. Not the average. Not the optimistic ones. The LOW end. That anchor creates your margin of safety.
On LTV, I hold to 65% of ARV as my standard ceiling. Some lenders go higher. I’ve seen what happens when they do. The property is your PRIMARY security. If the borrower walks, you need to exit at a price the market will actually pay.
For renovation funds, I never release the full rehab budget upfront. Draws tied to completed work protect your capital and keep the borrower moving. If funds go out all at once and the project stalls, you’re holding a half-renovated house. I cover draw structure in my post on how to protect your capital on every deal.
The 50/50 Draw Structure That Protects You
Here’s a real example. A borrower bought a property for $175,000 cash and needed $100,000 for construction. I gave them $50,000 upfront and held the other $50,000 as a draw. When they hit the agreed milestone, the second $50,000 was released. Clean, simple, aligned incentives.
That structure works because the borrower had real skin in the game from the cash purchase. If something went sideways mid-project, I wasn’t holding an over-leveraged shell. I was holding a property with meaningful equity behind it. That’s the WHOLE POINT of structured draws on construction deals.
Stage Funding vs. Dutch Interest
This is a detail a lot of new lenders overlook. Stage funding means your borrower pays interest only on funds actually drawn. Not the full commitment. Dutch interest means they pay on the full loan amount from day one, even if construction funds haven’t been disbursed yet.
Dutch interest is more common among private lenders and meaningfully increases your yield. But it also increases borrower cost. Know which structure you’re using and make sure your loan docs reflect it clearly. Your loan documentation on fix-and-flip needs to be airtight. A sloppy promissory note or missing guarantee is how lenders lose money they should have kept. Review the essential loan documents every private lender needs before you fund your next deal.
Residential Bridge Loans
Here’s the thing nobody talks about. We think we’re fix-and-flip lenders. That’s the product we market, the product borrowers ask about, and the product discussed at every meetup. But when I looked at our loan book, 60% of our transactions were REFINANCES. Cash-out on rentals. Acquisition-only bridge loans. Refinances for renovations. Deals that had nothing to do with buying a distressed house to flip.
I had a lender friend from Chicago tell me once: “I don’t do refinances.” He genuinely believed his business was pure fix-and-flip. When I walked him through what a residential bridge loan actually is, he realized he was already doing them. He just hadn’t labeled them that way. Don’t be that lender. Know what you’re funding.
What Residential Bridge Loans Actually Look Like
The most common scenario I see: a borrower owns a rental property free and clear. They want cash out to renovate it, cover carrying costs, or fund another deal. They’re not buying anything. They’re not flipping. They need a bridge loan secured by an asset they already own. They plan to refinance into permanent financing or sell when the work is done.
Another scenario: a borrower bought a property for cash and needs construction funds after the fact. They already own it. They can’t get a bank loan because the property is distressed. They come to you for a $75,000 loan on a $100,000 property. That’s a bridge loan. Clean collateral, meaningful equity, clear exit. Those are the deals you WANT.
Cross-Collateral Solves More Problems Than You Think
One of the most valuable tools in residential bridge lending is cross-collateral. I had a borrower come to me wanting 100% financing on a new acquisition. Zero down. Normally that’s a hard pass. When I asked the right questions, I found out he owned 3 other rental properties free and clear. So instead of saying no, we structured a cross-collateral loan using all 4 properties as security. He got his deal funded. I got a loan with real equity behind it across multiple assets.
The first loan we ever funded as a company was cross-collateralized. Residential and small multifamily, tied to a pizza business purchase. Unusual deal. We got creative. That willingness to get on the phone and ask questions is what separates lenders who find deals from lenders who only fund the obvious ones. I talk about building those relationships in my post on turning leads into long-term borrower relationships.
Refinances Have a Different Risk Profile
I want to be honest about this: refinance exits carry a higher default rate than sale exits. When a borrower’s plan is to sell, either the sale happens or it doesn’t. Binary. When the plan is to refinance into a bank loan, you’re dependent on their credit, the market, and whether a conventional lender will do the deal on the timeline projected. That adds uncertainty.
That said, many refinance deals DO work out well. Especially when the borrower has meaningful equity, a real plan, and you’ve structured the loan conservatively. The key is eyes-open underwriting. Know the exit strategy, stress-test it, and price the risk accordingly. Don’t pretend a refinance exit is as clean as a sale just because the borrower sounds confident.
Small Balance Commercial Loans
This is the most UNDERSERVED niche in private lending. I’m convinced of it. Small balance commercial (multifamily, office, retail, storage, light industrial, flex space, all under $2 million) is a category institutional lenders ignore and most private lenders overlook. That’s your opportunity.
Here’s why banks won’t touch it. A commercial appraisal on a small deal costs $15,000 and takes 2 months. For a bank to spend that on a $500,000 loan makes no economic sense. Their compliance departments, their appraisal requirements, their regulatory overhead. None of it is built for small deals. I know a lender who does 50% LTV nationwide, any asset type, no fix-and-flip at all. That’s his entire business. He never competes with institutional capital because institutional capital doesn’t show up where he lends.
How Small Balance Commercial Underwriting Works
The core difference from residential: I underwrite to AS-IS value only. No ARV. No projections about what the property will be worth after improvements. I lend on what it’s worth today and cap at 50% LTV. Average is probably 40 to 50% across our commercial book. That conservative posture is what makes the product work. You’re buying yourself margin on an asset class that doesn’t have the same comp data infrastructure as residential.
Brokers are often involved on commercial deals. You’ll work with commercial mortgage brokers who have borrowers you’d never reach through your residential marketing. That’s additional deal flow from the same advertising spend. The deals come from the same channels: Google Ads, Facebook, SEO, meetup groups, Connected Investors, Bigger Pockets. You don’t need a separate campaign. You just need to be OPEN to what comes in.
Why Commercial Borrowers Stay on Your Books Longer
One pattern I’ve noticed: commercial borrowers tend to stay on the books longer than residential. Not because they can’t repay. Getting permanent financing on a small commercial property is genuinely hard. Banks are slow. The appraisal process is expensive. A borrower who planned a 12-month hold often extends to 18 or 24 months while they wait for a conventional solution.
That’s not necessarily a bad thing for a lender. If the collateral is sound and the loan is performing, extended hold time means extended yield. Make sure your loan documents address extension options and that you’re pricing appropriately for the duration. The most common hard money mistakes on commercial deals come down to under-pricing the complexity. Not the deals themselves going bad.
What Stays the Same Across All 3 Products
The products are different, but the principles don’t change. Every deal I fund goes through the same 4 C’s framework. Residential acquisition with a construction holdback. Cash-out bridge on a free-and-clear rental. Small balance commercial. Doesn’t matter.
- Collateral, Does the property, underwritten conservatively, support the loan amount? This is always first.
- Character, Does this borrower have a track record I can verify? Have they completed similar projects? Trust, but verify.
- Capacity, Can the borrower absorb unexpected costs? Do they have reserves? Over-budget projects are the norm, not the exception.
- Credit, I look at it, but it’s secondary. A great deal with a borrower who has a 680 credit score beats a weak deal with a 750.
If any of those four breaks down seriously, I don’t fund the deal. Product type doesn’t change that. I see too many lenders get excited about a specific product and start compromising on fundamentals because the deal type is hot. That’s how losses happen. We follow deal quality, not category. The most common hard money mistakes almost always trace back to one of the 4 C’s being ignored.
Build Systems Before You Scale
Each of these 3 products has a different operational footprint. Fix-and-flip and purchase-and-construction need draw management and renovation oversight. Residential bridge loans need a workflow for evaluating refinance exits and cross-collateral structures. Small balance commercial needs a different underwriting template: as-is value only, commercial comp analysis, broker relationship management. You need the system BEFORE you grow volume. Not after.
Lenders who scale without systems usually hit a wall somewhere between $5 million and $15 million in their portfolio. Things that were manageable with 10 loans become chaotic with 40. I’ve written about exactly this inflection point in my post on building your first $10 million lending portfolio. It’s one of the most read pieces in this community for a reason.
“The lenders who build durable businesses are the ones who protect capital first and optimize yield second. Every product decision, every underwriting call, every policy you set should flow from that priority.”
Private lending as an industry is growing fast. The top 100 private lenders grew total volume by over 25% in 2024 according to data from Forecasa, cited by the American Association of Private Lenders. That growth is real and it’s creating real opportunity. Growth also brings competition. Competition means borrowers have more options. Lenders who don’t have tight systems and strong product knowledge will get the deals nobody else wanted.
If you’re serious about building a lending business around these 3 products, the frameworks matter. The systems behind scaling to a $50M+ portfolio aren’t magic. They’re consistent application of the same principles, deal after deal.
If you want to go deeper on any of these products, the Hard Money Mastermind was built for exactly that. Over 2,600 lenders, brokers, and investors sharing real deal flow, capital, and underwriting knowledge. Check out the Mastermind blog for more frameworks and case studies from real deals we’ve funded and reviewed.
Frequently Asked Questions
What is a fix-and-flip / purchase and construction loan and how does it work for lenders?
A fix-and-flip or purchase-and-construction loan is a short-term loan, typically 6 to 18 months, secured by a residential investment property. The borrower uses the funds to acquire and renovate the property, then repays the loan at sale. As a lender, you’re underwriting the collateral value post-renovation (ARV), the borrower’s rehab plan, and their track record. Not their personal income. Conservative LTV (65% of ARV or lower) and a controlled draw process for renovation funds are your primary risk controls. Some deals include a construction holdback disbursed in stages. Others are pure acquisition loans with no rehab component.
What is a residential bridge loan and how is it different from a fix-and-flip loan?
A residential bridge loan covers a broader range of transactions than fix-and-flip. That includes cash-out refinances on rental properties, acquisition-only purchases with no rehab, and cross-collateralized deals secured by multiple properties. The borrower isn’t necessarily buying and flipping. They might own a property free and clear and need capital for renovations, carrying costs, or another deal. The key underwriting difference: your exit strategy analysis changes. Sale exits are binary. Refinance exits depend on the borrower’s credit and market conditions at a future date. That adds risk that needs to be priced in.
What is a small balance commercial loan and why is it underserved?
Small balance commercial loans are business-purpose loans under $2 million secured by income-producing properties: multifamily, office, retail, storage, light industrial, or flex space. They’re underserved because institutional lenders and banks can’t make the economics work at that deal size. A commercial appraisal costs $15,000 and takes 2 months. For a bank to absorb that on a $500,000 loan makes no sense. Private lenders who underwrite to as-is value at 40 to 50% LTV can move faster, charge appropriately for the risk, and serve a borrower base that has almost no other options.
Should a new hard money lender focus on one loan type or multiple products?
I’d recommend starting with fix-and-flip and residential bridge. Those deal types share the same marketing channels and borrower base. Once your underwriting and draw management systems are solid, adding small balance commercial makes sense. The underwriting template is different, but the risk management principles are the same. The key is not spreading too thin before you have systems. Lenders who try to do everything at once usually end up doing nothing well enough to protect their capital.
How do hard money lenders price fix-and-flip versus residential bridge versus small balance commercial loans?
Fix-and-flip and purchase-and-construction loans carry higher rates to reflect short-term, construction-phase risk. Typically in the 10% to 13% range in today’s market, with most lenders also charging 2 or more points at origination. Residential bridge loans are priced similarly, though refinance-exit deals may carry slightly higher rates to reflect the softer exit certainty. Small balance commercial loans are priced based on asset type, LTV, and deal complexity. Expect similar rate ranges to residential bridge, but with more variation by market and property type. All three products typically include origination points, document fees, processing fees, and underwriting fees that add to total yield for the lender.
Disclaimer: This content is for educational purposes only and does not constitute financial, legal, or investment advice. Lending laws and regulations vary by state. Always consult qualified legal and financial professionals before making lending decisions.
