Hard-Money Loans and Draws: How to Record Them in Your Books

What hard money books need to track

A hard money loan is not one number. It is the principal you borrowed, the points you paid at closing, the interest that adds up each month, and the draws you pull down to pay for the rehab. Each one needs its own line so the profit per flip is real.

When you track all of it by project, you can see which flips pay and which ones cost more than they bring in. When you do not, you get one big pile of loan money and rehab costs and no way to tell whether the first flip or the fifth flip was the good buy.

Most fix and flip remodelers run more than one project at once. Some houses flip fast. Some sit on the market. Some need a full gut. Some need paint and floors. Each house has its own loan, its own draws and its own rehab budget. When the books tie each line to the project, the business makes sense. You can read more about how we keep these lines tied on our bookkeeping page.

Here is what a clean flip looks like.

When each line ties to the project, the profit per flip is real. When they sit in one pile, you are guessing.

How the loan shows up in your books

A hard money loan is borrowed money. You owe it back. The day it lands in your bank, it is not income. It is a liability.

The clean way is to book the loan to a loan account on your balance sheet. The full amount you borrowed goes in as a liability. The same amount lands in your bank as cash. Your balance sheet shows what you owe and what you hold. Your profit and loss does not move, because borrowed money is not income.

The messy way is to book the loan as income. Now your profit looks huge the month the loan lands. When you pay the loan back, your profit drops. Your books do not match what really happened. Your CPA has to sort it out at year end.

Here is how to keep the loan clean.

• **Book the loan to a liability account: ** not to income.
• - **Match the loan amount to the bank deposit: ** the two should agree on the day it lands.
• - **Keep one loan account per lender: ** so each lender is easy to track.
• - **Tag the loan to the project: ** so each flip carries its own debt.
• - **Check the loan balance against the lender statement each month: ** the two should agree.

When the loan sits in a liability account, your profit is real. When it sits in income, your profit is a lie you find out about at tax time.

How a draw shows up in your books

A draw is the money you pull down from the loan to pay for rehab work. The lender does not hand you the full amount at closing. You ask for draws as the work moves forward. Each draw is a piece of the loan that moves into your bank and then out to a contractor.

The clean way is to book each draw in two steps. First, the draw moves from the loan to your bank. The loan balance goes up and the cash goes up by the same amount. Then the cash moves out to the contractor. The rehab cost lands on the project line. The loan still shows what you owe. The rehab shows what you spent.

The messy way is to book the draw straight to rehab and skip the loan side. Now your loan balance does not match the lender statement. You can not tell how much you have drawn and how much you have left. You can read more about how we tie draws to rehab in our painters and flooring job costing guide. The same idea works for a flip.

Here is how to keep draws clean.

• **Book each draw from the loan to the bank first: ** then pay the contractor.
• - **Tag each draw to the project: ** so the rehab cost lands on the right flip.
• - **Match the draw amount to the lender draw letter: ** the two should agree.
• - **Track drawn versus remaining: ** so you know what you have left to pull.
• - **Log the draw the day it lands: ** not at month end from memory.

When each draw moves through the loan and out to the rehab, the loan balance stays right and the rehab cost lands where it belongs.

How interest and points show up in your books

Hard money loans cost more than bank loans. Lenders charge points at closing and interest each month. Points are a fee paid up front. Interest is the monthly cost of carrying the loan. The two need their own lines.

The clean way is to book points to a points account and interest to an interest account, both tied to the project. Points are a cost of the flip. Interest is a cost of the time you hold the house. When you sell the flip, both show up in the profit for that project. You can see what the money really cost.

The messy way is to lump points and interest into the loan balance and never pull them out. Now your loan balance is wrong and your carrying cost is hidden. You can not tell if a flip that sat for six months cost more in interest than it made in profit.

Here is how to keep interest and points clean.

• **Book points to a points account: ** not buried in the loan balance.
• - **Book interest to an interest account each month: ** not at payoff all at once.
• - **Tag both to the project: ** so each flip carries its own carrying cost.
• - **Match interest to the lender statement each month: ** the two should agree.
• - **Watch the carrying cost grow: ** a flip that sits longer costs more.

When points and interest sit on their own lines, you can see what the loan really cost. When they sit in the loan balance, the cost is hidden.

How to tie each draw to the project

A flip runs on one loan and many draws, but the profit comes from the project. Each draw needs to tie to the house it paid for.

The clean way is to turn on class tracking in QuickBooks Online and set up one class for each flip. Every loan entry, every draw, every contractor bill and every carrying cost carries the class for the house it belongs to. When you run the profit and loss by class, each flip shows in its own column. You can see which house paid and which one ate the budget.

The messy way is to skip classes and book every draw to the same rehab line. Now you can not sort by house. You can not tell if the first flip went over budget or if the second flip came in under.

Here is how to keep flips apart.

• **Turn on class tracking in QuickBooks Online: ** and set one class per flip.
• - **Tag the loan to its project class: ** so each house carries its own debt.
• - **Tag every draw to its project class: ** so rehab sorts by house.
• - **Tag every contractor bill to its project class: ** so costs sort by house.
• - **Run the profit and loss by class each month: ** so each flip shows in its own column.

When each line carries a class, the business reads like a row of houses. When it does not, the business reads like one big blur.

How the payoff shows up when the property sells

The end of a flip is the sale. The buyer pays you. You pay off the hard money loan. What is left is the profit. Each step needs a line.

The clean way is to book the sale, pay off the loan from the sale proceeds, and clear the loan balance to zero. The sale price goes to income. The loan payoff reduces the liability. The rehab, the points and the interest already sit on the project line. The difference is the real profit for that flip.

The messy way is to book the sale and leave the loan balance hanging. Now your balance sheet shows a loan you do not owe. Your profit is wrong because the carrying costs never got pulled in. Your CPA sorts it out at year end, and it takes longer than it should.

Here is how to keep the payoff clean.

• **Book the sale price to income: ** and tag it to the project class.
• - **Pay the loan off from the sale proceeds: ** and clear the loan balance to zero.
• - **Confirm the payoff amount with the lender: ** the two should agree to the penny.
• - **Pull in every carrying cost: ** rehab, points and interest all on the project line.
• - **Run the profit and loss by class after the sale: ** so the real profit shows.

When the payoff clears the loan and pulls in every cost, the profit for the flip is real. When the loan hangs and the costs sit loose, the profit is a guess.

How to keep each flip on its own line

A flip operator with three houses and one checking account needs a way to sort the money by project. Classes in QuickBooks Online do this.

The clean way is to set up one class for each flip and tag every line to it. The loan, the draws, the contractor bills, the points, the interest and the sale all carry the class for the house they belong to. When you run the profit and loss by class, each flip shows in its own column. You can see which house paid and which one ate cash.

The messy way is to book every line to the same accounts with no class. Now you can not sort by house. You can not tell if the first flip earned its keep or if the third flip is the one that needs a closer look at the budget.

Here is how to keep flips on their own lines.

• **Set one class per flip: ** and tag every line to it.
• - **Tag the loan and every draw to its class: ** so debt sorts by house.
• - **Tag every contractor bill to its class: ** so rehab sorts by house.
• - **Tag points and interest to its class: ** so carrying costs sort by house.
• - **Run the profit and loss by class each month: ** so each flip shows in its own column.

When each line carries a class, the business reads like a row of houses. When it does not, the business reads like one big blur.

How the month end close works

At month end, every flip needs its lines added up. The loan balance, the draws, the rehab, the points and the interest all pull together into one project total. When the flips roll up by class, you see each house side by side.

We start with the bank. We match each draw to the deposit that landed. We match each contractor bill to the check that went out. We book the interest and the points to the project line. We check each loan balance against the lender statement. Then we add up the month by project. We send you the profit and loss by class, a balance sheet, and a cash summary. Each flip sits inside the report.

Here is a simple month end check.

• **Match each draw to the bank: ** every deposit cleared.
• - **Match each contractor bill to the bank: ** no orphan costs.
• - **Book interest and points each month: ** not saved for payoff.
• - **Check each loan balance against the lender statement: ** the two should agree.
• - **Run the profit and loss by class: ** so each flip shows in its own column.

When the close runs every month, the business stays clear. When it skips a month, the flips stack up and the next month is harder to close.

A situation we clean up

The loan balance that never matched

A flip operator runs three houses at once. Every draw lands in one general rehab line. The loan sits in the bank as cash with no liability on the books. The points and the interest are buried in the loan balance. At sale, the loan gets paid off but the books still show the full balance. The owner can not tell which flip made money and which one cost more than it brought in.

Here is how we handle it. We go back through the open months and pull each draw out of the general rehab line and tie it to the project it paid for. We set up a loan account for each lender and move the principal in. We pull the points and the interest out of the loan balance and onto their own lines, tagged to the project. We set up one class for each flip and tag every loan, draw and bill to its house. When we are done, the owner can run the profit and loss by class and see each flip in its own column. We set up a rule so the next draw carries the right class from the start.

Mistakes we fix

• Every draw booked to one general rehab line with no project tag
• The loan balance that never matched the lender statement
• Points buried in the loan balance and never pulled out
• Interest saved for payoff instead of booked each month
• No class tracking turned on, so no way to sort by flip
• A sale booked with the loan payoff left hanging
• Carrying costs that never made it to the project line
• The payoff amount that did not match the lender to the penny
• No profit and loss by class run after a sale
• A flip that sat for months and the interest cost no one saw

Common questions

How do I record a hard money loan? Book it to a liability account, not to income. The full amount you borrowed goes in as a liability and the same amount lands in your bank as cash. Your balance sheet shows what you owe and what you hold. Your profit and loss does not move.

How do I record a draw? Book each draw in two steps. First, the draw moves from the loan to your bank. The loan balance goes up and the cash goes up by the same amount. Then the cash moves out to the contractor and the rehab cost lands on the project line.

How do I record points and interest? Book points to a points account and interest to an interest account, both tied to the project. Points are a cost of the flip. Interest is a cost of the time you hold the house. When you sell, both show up in the profit for that project.

How do I keep each flip separate? Turn on class tracking in QuickBooks Online and set up one class for each flip. Tag every loan, draw, bill and carrying cost to its project class. Run the profit and loss by class so each flip shows in its own column.