Exit Strategy: Why It’s Crucial in Hard Money Lending

If you’ve been speaking with a hard money lender, chances are the term “exit strategy” has come up more than once. There’s a good reason for that. Hard money lenders care deeply about your exit strategy—because it determines how (and when) they get repaid. But it’s not just about the lender. Your exit strategy also dictates how and when you, the borrower, make money. Let’s explore what an exit strategy is, the most common types, and how selecting the right one can maximize your profits.

What Is an Exit Strategy in Hard Money Lending?

For a hard money lender, an exit strategy is the borrower’s plan for repaying the loan. Unlike conventional lenders—who typically assume a long-term repayment plan over 15 to 30 years—hard money loans are short-term, usually 12 months or less. These loans are often used to fund the purchase and renovation of distressed properties. Since the risk is higher, the costs are higher too, making it essential for both parties to have a clear, realistic plan for paying off the loan quickly.

Having an exit strategy isn’t optional; it’s a critical component of the borrowing process. Repaying hundreds of thousands of dollars in borrowed money within a year requires careful planning. And that plan—your strategy for repaying the loan—is at the heart of your exit strategy.

Two Types of Exit Strategies: Your Money or Someone Else’s

Exit strategies generally fall into two categories: repaying the hard money loan with your own funds or with someone else’s.

Let’s start with repaying it yourself. While technically possible through an inheritance, lottery win, or draining your savings, those aren’t strategies your lender will take seriously. The most viable self-funded exit strategy is the fix-and-flip model: renovate the property and sell it for a profit.

Example:
You purchase a distressed property for $300,000 and invest $70,000 in renovations. A hard money lender funds $325,000. Eight months later, you sell the property for $500,000. The proceeds pay off the loan, cover your expenses, and leave you with a $65,000 profit. In this case, your exit strategy—selling the property—worked perfectly for both you and your lender.

There’s another way borrowers repay with their own funds, although no one likes to talk about it: foreclosure. Technically, foreclosure is an exit strategy, but it’s the equivalent to flyng off the ramp and calling it “exiting the highway” It’s costly, time-consuming, and often leads to financial loss and legal issues for the borrower—and frustration and potential losses for the lender. No one benefits from this kind of “exit.”

Exit Strategy Using Someone Else’s Money: Refinancing

When you repay a hard money loan using funds from another lender, it’s called refinancing. This is a legitimate and often strategic exit strategy, but it requires more planning. You must qualify for the new loan, which means meeting the new lender’s guidelines.

There are two primary refinancing exit strategies:

• Refinancing with a Conventional Lender:
  This is often the plan from the beginning for investors pursuing a buy-and-hold strategy. Once the renovations are complete, they refinance into a long-term mortgage. This exit strategy requires meeting income and credit score qualifications, which not all borrowers can do. If your credit is subpar, don’t rely on vague promises from a mortgage broker. A responsible hard money lender will help you determine whether refinancing is a viable exit strategy for you.

On few occasions, a real estate investor might defer to refinancing to refinancing with a conventional lender if they are unable to sell their property within a certain time frame and at the specific price. That typically means that either they pricing their property too high (and being stubborn about it) or there is a dramatic downturn in real estate market. One thing for sure – something gone awry with their initial plans and they are now scrambling with Plan B. If this is your case, make sure that you qualify for refinancing before your exisiting hard money lenders’ interest rate and other carrying costs take a substantial chunk of your equity.

• Refinancing with Another Hard Money Lender: And talking about original plans going awry. In some cases, real estate investors might experience significant delays with their renovation process. If the property’s still undergoing rehab and they need more time or money to complete it refinancing with a conventional lender is not an option. In such a case, their exit strategy might be refinancing with another hard money lender. At New Funding Resources, we offer refinancing options to qualified borrowers with promising real estate investment opportunities.

Summary:

An exit strategy is a crucial part of any real estate investment funded by a hard money loan. It outlines how a borrower plans to repay the loan—either through selling the renovated property (fix-and-flip), refinancing into a long-term loan (buy-and-hold), or in rare cases, refinancing with another hard money lender. The right exit strategy should be determined before closing and tailored to the investor’s goals, financial situation, and market conditions. A well-planned exit strategy ensures profitability and builds long-term credibility with hard money lenders.