Private Lending - Flat Rate vs Annualized?

7 Replies

Hey all,

For those using private money from personal relationships  - in this case - on rehab projects - what are your opinions on flat rate returns vs annualized?

10% flat rate on $100,000 is quite different than 10% annualized when project durations are 4-6 months.

I understand if the numbers work in either case then it's a good deal.

Im just curious as to what terms are being used more - flat vs annualized.


Usually it is an annualized return, ie: 12% interest is 1% per month the money is still out. This is by far the most common.  Hard money lenders usually use a combo. They charge "points" up front in addition to annualized interest. 

It comes down to whatever you can negotiate. My thought is with a private lender keep it simple. Don't get into complex structures which will be difficult to explain.

The key thing here is its a personal relationship. So it it likely they WONT charge you points, because they wont know that is usually how its done. 

And if they ask for them I would offer a higher rate with no points vs points and a lower rate. It keeps it simpler for you and them like @Ned Carey recommends above.

But to answer your direct question... in personal made private notes and hard money loans, its always more common to annualize the interest. That's not to say the payments will be made monthly.

@Ned Carey .. Exactly!  Everything is negotiable.. 

It all depends on what you want for each project @Griffin Fehrs   . I rarely ever see flat payments from private/hard money lenders. When I do see them, it's usually around 10% of the total loan. This is a lot of money. It all depends on how much you are borrowing vs the size of your margins/your gross profits. For most projects I've either financed or purchased, the more common annualized rate makes way more sense. Just set up an excel spreadsheet and run your numbers both ways! I would also check junk fees, as many lenders charge around $3k in unnecessary fees that you can either negotiate out or use a different lender on. Be sure there are No Prepayment penalties. Also, as was previously mentioned, building a long lasting relationship with the lender is probably the #1 tip. This will get you the furthest in the long run. Hope this helps! 


@Ben Stoodley  it is a lot of money! I've assumed and always offered annualized, but have seen some do deals at flat rate - which initially arose to my question.

Thanks for the tips, as well!

I often get a fixed amount for a fixed term and then monthly interest for any extra time. For example $5K for up to  3 months and then 1% per month after that with a maximum of 6 months. I try to shoot for an annualized return of around 18% when all said and done.

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