Speed vs. Rates: What Matters More for Investors?

Question

When funding deals, especially fix & flips or construction projects, there’s often a trade-off between speed of funding and interest rates.

Which do you prioritize when working on a deal? Do you prefer fast access to capital even at higher rates, or do you wait for the lowest possible cost of money?

This has been a hot topic in my network lately—I’d love to hear how you approach it.

Mike Klarman · Answer

For short-term loans, you should be less rate sensitive.  It's a short-term position with 6 - 12 payments)that will be bridged to something more final that has 360 payments.  I can't speak to giant construction jobs, but I've been through lots of deals that wound up going sideways and one thing I never said was "Only if the rate was 10.99% instead of 11.99% this would've turned out differently".

Of course you always want the lowest cost of debt as well, but do you know what really matters and one huge reason why investors who flip/Brrrr to scale have a private money source?  They get the money upfront for the rehab.  I mean a true PL, not a commercial PL/HML/Broker.

I've been through 40 - 50 rehab jobs now.  The draw process chokes up the production and rhythm of the job.  You are always working draw to draw b/c investors, after the purchase is complete, do not have another 30k - 40k to front a contractor so they can really get to work.  It's maybe 10k more.  That gets lit on fire.  Draw.  Stop for 48 hours.  That 10k unlocked a little more money, burn that up, stop, draw time.  You do that for 3 - 5 months.  Each draw costs $199 too.  You really need to be able to front 50% of the rehab comfortably, this way your project never runs dry of money.  Projects go bankrupt all the time.  Nothing to unlock, no money to continue.  Happens.

A PL that trusts you enough to give you the 80k rehab upfront means that your project will run faster, smoother, cost less, might be able to get better deals on materials/labor.  But you need to know what the right things to do with the money are.  You can work on multiple facets at once.  The roofer, the landscaper, and the electrician can all be at the house the same day as the plumber and the bathroom company redoing the bathrooms.  On a draw process that may get done a task or two at a time.

It's not the rate on short-term that is the killer.  It is the market, the project itself, the economy, inventory.  The x factors.  But if the exit is refi and not sell then these x factors are a little less impactful.

If you borrow 100k on a bridge loan at 12% and some exp investor with good credit can get the same money at 10%.  Your payment is only $167 more per month.  If you both stay in the loan 6 months that's an extra cost of 1k.  That's nothing really.  You'd gladly pay 12% to get the rehab funds in your hands at closing rather than take 10% and work off draws.

Matthew Crivelli · Answer

Find is a sweat spot. Two week close with strong terms on a fix and flip is 100% archivable. You want to close in 3 days? Higher rates and less time for vetting. Sometimes investors get mad when a hard money lender wants an appraisal but it really is great protection for the investor (especially new ones) from entering in a deal that just isn't penciling.

Zachary Clevenger · Answer

The key is... run the numbers. If it pencils out at at higher APR, then the refinance rate is a moot point.

Speed...

James Mc Ree · Answer

Loan price & rate are my priority. Speed typically varies 30-60 days which is usually within my closing window for inspections, insurance, etc. I am a buy & hold LTR investor.