Private Money: When 18% is Less than 12%

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I was never late.  I always paid my bills on time.  The mortgage.  The credit card.  The car payment.  Electric, water, phone and cable – like clockwork every month.  Heck, I even paid for magazine subscriptions 3 months prior to expiration.

Then suddenly, in August of 2007, there was too much month and not enough money.  My real estate business collapsed faster than you can say mortgage backed security.

I got behind on the mortgages – first on my rental properties and then my personal residence.  The credit cards too.  In less than six months my 740 credit score dropped to under 600.  Poof.  Gone.  No more lines of credit or traditional bank financing for me.

Fortunately, things have turned around a little since then.  I’m generating revenue from my fix and flip business and I’d like to invest the extra cash in a few rental properties.

But what’s a guy like me, with subpar credit but enough cash to put down on a rental property to do?  The answer is private money, also known as hard money.

Now I already have a hard money lender for the fix and flip business.  Their terms are straight forward – 18% simple interest, $900 loan origination fee.  I make monthly interest payments and the loan matures after one year.  Expensive?  Yes.  But I only hold onto the property for 2-3 months.

For rental property I need a lower interest rate.  So I made a few calls and found a local company that will lend at 12%.  Good, not great.  However, even at 12% interest, with property taxes, HOA dues and insurance I can cash flow $300 a month purchasing a short sale deal I just found on the MLS.

I started thinking – why don’t I use this private money lender for my fix and flips?  The interest rate is certainly better.  Then I considered the terms.

The 12% lender charges 3 points and a $900 loan origination fee.  In three months, the average time it takes me to flip a house, I’d pay the lender $8,100 in fees and interest on a $120,000 loan.  I’d pay $6,300 to my 18% lender for the same deal.  As a matter of fact, the 12% loan doesn’t become a less expensive option for me until month 7.  If it takes me that long to flip a house then I’ve really done something wrong.

The lesson here is if you’re considering a private money loan to fund a deal, no matter your exit strategy, be sure to examine the terms closely.  Sometimes more is less.

About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.


  1. It is a very common mistake when people ignore the points and simply look at the interest. Points are essentially the same thing and need to be annualized out if you are doing short term holds. 3 points paid 4 times per year is an extra 12% in interest.

  2. Great article. New investors should read this article twice. Always run the numbers. They are so important and this article shows that you so run it through for at least a year to get a clearer picture. When doing any numbers you must always consider every thing such as points, fees, penalties, interest, taxes, carrying cost, broker fees taxes and increases, insurance, etc. Some investors get excited and don’t want to look at the whole picture because they want the deal. The numbers never lie and usually will come back to bite you. Run those numbers forward and backwards.
    Thanks for the insight


  3. Great Article Marty. Although it was not the main point of your article, I took away from it that you have tried and failed and are now re-starting your business. I think this is the first airticle i have read where someone has openly admitted mistakes. For me, as a new investor, things have all been moving in the right direction. I don’t know that I would be able to take that big of a fall and get back up. I would be interested in learning from the things that caused you problems, if you are willing to share? Maybe you could write an article so many people could learn from it. Either way, thank you for your openness.


    • Josh – If you haven’t seen people in the investing business admitting mistakes, you’re reading the wrong sources. Almost every one of our authors here at BiggerPockets has talked about the mistakes they’ve made and how those have helped them to be a better investor – at some point in time. I believe that this is extremely important for a writer to do, as anyone worth their salt — or at least anyone being honest — has made mistakes and has learned from them. Thanks for picking the subtleties up from Marty’s article . . . he’s one of the best writers in the investing business and we love having him as a contributor to BiggerPockets.

    • Josh, my blog,, is full of posts about my success and failures (mostly failure because it’s more entertaining to read.) I’ve also touched on my failures here on BP too. Check out my earlier posts. Good luck to you!

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