What Are The True Costs of Hard Money Loans
This guide will cover the true costs of hard money loans. There are costs of hard money loans. Hard money loans are not cheap. The origination fees are higher, and rates are higher than traditional commercial loans. However, the costs of hard money loans are well worth the rewards for savvy real estate investors. John Strange, a commercial loan officer at Lending Network, LLC, shares his experience with a hard money loan borrower:
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 was 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 the value of the subject property. Then we can talk about the origination and processing. That’s the only fee we have. There are no other “rubbish fees.” “how much are those fees?” In the following paragraphs, we will cover the true costs of hard money loans.
Upfront Points And Fees Costs of Hard Money Loans
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 cute).
Many sophisticated professional real estate investors prefer paying the cost of hard money loans and getting their financing with a hard money lender versus a traditional commercial loan from a bank. NO redtape, no hassles, no stress, and fast closings with hard money loans.
I asked why they would say that, and they seemed 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, a spread 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 banking system we won’t get into now.
Cost Of Carrying Capital For Hard Money Lenders
What needs to be understood is that the cost of carrying capital must be figured liberally into any formula you use to “run the numbers” on your opportunities. If you’re trying to figure out 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 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 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. Some costs weren’t truly figured into their opportunity. She was thankful, and they passed on the deal anyway.
Shopping For Best Terms and Rates
When shopping for a hard money lender, time, integrity, and service is the premium you pay. There are hundreds of hard money lenders. Many hard money lenders are individual private investors. Hard money loans are not just for investors with bad credit or credit issues. Real estate investors with prime credit and income often opt for hard money loans. Why? Time. Time is money. Time is opportunity. Time is what costs money.
Lending Network, LLC is the nation’s premier hard money lender. Loan officers at Lending Network, LLC are available seven days a week, evenings, weekends and holidays.
Here’s the bottom line: Shopping for a deal is ok. However, remember that 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 good week.
