Hard Money Loans for Apartment Syndications: When They Fit and When They Don't
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A hard money loan is short-term debt from a private lender, sized mainly on the property's value and the business plan rather than on the borrower's full financial history. It closes faster than a bank or agency loan, and it can fund a purchase and a renovation in one loan. The price is a higher interest rate, upfront points and a maturity date that can arrive in one to three years.
This guide explains how these loans work for apartment deals, when a syndication should consider one and the questions to ask the lender.
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How are hard money loans sized?
Private lenders usually size the loan from the purchase price, the after-repair value and a loan-to-cost limit. They look at the sponsor's experience and the plan more than at tax returns. Terms vary widely, so get written terms from more than one lender before you compare.
Ask each lender for the same five items: the rate, the points, the interest reserve, the extension fee and the default rate. Compare the total cost over the planned term, not the headline rate.
What does a hard money loan cost?
The cost has four parts:
- Interest that is often higher than a bank or agency rate.
- Points, an upfront fee as a share of the loan.
- Lender and legal fees for underwriting, the appraisal and closing.
- Extension fees if the exit takes longer than planned.
A loan that looks cheap on the rate can cost more than a bank loan once the points and extension fees are counted.
A hypothetical example
These numbers are made up for illustration. Your lender's terms will differ.
| Item | Amount |
|---|---|
| Loan amount | $5,000,000 |
| Interest rate (made up) | 11% a year, interest only |
| Points at closing (2% of the loan) | $100,000 |
| Interest for the first 18 months | $825,000 |
| Extension fee for a 6-month extension (1%) | $50,000 |
| Interest during the 6-month extension | $275,000 |
| Total financing cost over 24 months | $1,250,000 |
In this case the financing alone costs about $1.25 million over 24 months. If the renovation finishes on time and the building refinances, the plan can work. If the refinance is delayed and the sale falls through, the loan keeps charging. Model that case on purpose.
When does a syndication use one?
- The building needs a light to medium renovation before it can support a permanent loan.
- The sponsor has a clear exit, such as a refinance after the rent increases or a sale.
- The equity raise and the loan can close on the same schedule.
- Investors understand the higher cost and the risk of a short term.
When should you avoid one?
- The building is already stable and fits an agency or bank loan.
- The exit depends on rents or market prices that are not yet proven.
- The plan has no money for interest and carrying costs if the exit slips.
- Investors are told the loan is cheap without seeing the total cost.
What to ask the lender
- What are the rate, points, extension fee and default rate?
- What is the maturity date, and can it be extended, and at what cost?
- Is there an interest reserve, and how is it funded?
- What reports are required, and who pays for them?
- Is the loan recourse, and what does a default look like for the sponsor?
Compare these answers with the bridge loan guide, which covers a similar short-term structure, and with the loan types comparison.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). The deal's offering documents describe the debt, its maturity and the cost of extending it, so investors see the same numbers the sponsor sees. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
Start with a sponsor page or see the fees.
FAQ
Is a hard money loan the same as a bridge loan?
They are close cousins. Both are short-term. Hard money usually comes from private lenders and is sized on the asset, while bridge loans often come from banks or debt funds with their own terms. Read each term sheet.
Can a syndication use hard money for the purchase price?
Yes, if the deal is set up for it and the lender and investors accept the terms. The offering must describe the debt and the exit clearly.
What happens if the loan matures before the exit?
The sponsor must extend, refinance or sell. Extensions cost money, and a forced sale can cut investor returns. The plan must show this case.
Does a higher rate always mean a worse deal?
Not always. A short, well-managed loan can be the right tool. The question is whether the total cost fits the business plan.
Sources
- Bridge loan vs. agency loan for apartment syndications, for the short-term structure.
- Apartment loan types compared, for how other lenders size and price debt.
- Example figures are hypothetical. No market rate is cited here.
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.