The True Costs Of Hard Money Loans
I had an interesting conversation recently with a prospective borrower on the cost of getting a hard money loan. It went something like this: “ So, what are the terms and costs of you guys have for a hard money loan?”
I explained the standard terms were for 12 months interest only usually unless the amount got to be really large then we tried for 24 months max. The fees out of pocket are $300 for an interior inspection so that our investor has an independent unbiased opinion of value on the subject property, and then we can talk about the origination and processing. That’s the only fees we have. No other what are called “rubbish fees”. “and how much are those fees?”
Cost Of Hard Money Loans: Upfront Points And Fees
I explained that the origination is a minimum of $4000 or 3%-4% points depending on the loan amount and the processing is $495. Interest rates are between 12-16%.
Then comes the pushback. “Wait, how much is this going to cost me?”
I re-explained the terms and fees. Then silence.
“Wow, that’s pretty steep.” (Gotta love how they want to try to devalue Hard Money lending, it’s actually kind of cute)
I asked why they would say that and they seem to think that borrowing money is cheap. It is, when backed by a bank that has Billions in assets. When you’re talking about a private money lender and a broker in the mix, there is a spread that is created so that they can earn a living lending. It is the epitome of investing. Banks have done it for years so they have enough that they can afford to make it cheaper. And then again there’s the whole banking system which we won’t get into at this time.
Cost Of Carrying Capital For Hard Money Lenders
What does need to be understood is that the cost of carrying capital needs to be figured in liberally into any formula that you use to “run the numbers” on your opportunities. If you’re trying to figure you’re getting a low interest rate simply because you think that’s how it should be, you will be disappointed more times than not and frustrated when it’s time to close and you can’t find a lender that will do your loan for less than 15% or 16%.
We work with numerous Active investors that figure their numbers on much higher interest rates so that they know no matter what happens short of the property burning down, they will have a good to great net profit on the back end of their deal.
Talking with a different potential borrower today I had to share that unless they see their way to a 30% net profit AFTER carrying costs, rehab costs and purchase price which should already be at a discount of at least 30%, I wouldn’t even make an offer. What got me to do that was the wife saying that they were ok just making $15,000 net on the deal. In my head after I heard her numbers I could only see them losing about 5,000, or more on that same property. There were costs that weren’t truly figured into their opportunity. She was thankful and they passed on the deal anyway.
Here’s the bottom line: It’s ok to shop for a deal, however remember that the same as you can say no, so can a lender, and if there isn’t an agreement there isn’t a loan and you could potentially lose money getting hung up on costs. Figure your numbers high and when you get them better at a lower rate, it’s a pleasant surprise that you can use to increase your net. Make it a profitable week.
This article was written by Michael Kaleikini, President and Chief Operating Officer of Hard Money Capital Group. Michael Kaleikini is known as the Godfather of Hard Money Lending due to his expertise in originating, processing, underwriting, funding, and servicing hard money loan transactions. Michael Kaleikini represents hundreds of hard money investors and originates more hard money loans in the United States than any other hard money and private money loan originators. Michael Kaleikini is a financical writer and teaches hard money lending to attorneys, real estate agents, mortgage brokers, title agents, and other mortgage professionals. Contact Michael Kaleikini at email@example.com if you have any questions or are interest in becoming a hard money investor or are interested in hard money loans.