How To Calculate Return on Money

Question

I've heard some people who are flipping homes offering 20-25% return on money when looking for private money. How is that calculated? Are they figuring in points offered as well as the percentage rate on the loan? Thanks!

Ben Stoodley · Answer

I agree with @Jason Hirko on this. In my experience, the vast majority of my clients use our company to finance the majority of the deal (80% of purchase + 100% of rehab costs), then they bring in partners for the down payment (20% of purchase + closing and holding costs). This is for CA where the price points are very high, so even though they only have to come up with 20%+, it still equals $100k+ , which is a lot of money out of pocket for one person for one deal. So the advantage of JV deals, is that you wouldn't have to spend all $100k yourself, then you can use  your personal capital to do this on multiple deals at once. Hope this helps @Joe Schaak

Don Harris · Answer

@joe

@Joe Schaak regardless of the length of the loan Simple maths says  , if it's 12% apr, it's just that rate times the amount times the term. eX $100,000 at 12%for 8 months equals 12%/12 x 8 x $100,000 equals $8,000.  Each point is one percent annualized. If you charge 2 points, the above would  yield 14%.

Joe Schaak · Answer

@Jason Hirko@Ben Stoodley Great information, gentlemen. Thank you!

Jason Hirko · Answer

Yes that is how a private lender thinks. If they take a smaller return, it has more of a guarantee than if They JV and possibly split it. Generally speaking, the flipper will make more money paying a HML, but if the project goes south, there's no one to share the pain. Another reason the flipper might do a JV is because they don't have the cash for the down payment to a lender and JVing is the only way.

Ben Stoodley · Answer

Hi @Joe Schaak ... I believe @Jason Hirko is correct in regards to your original 20-25% ROI question. This is very likely in regards to a Joint Venture agreement. Private money here refers to individual investors who invest with the flipper. If I gave you $50k to flip a house, I would expect $10k-$12.5k profit from you when you are done flipping. This would be calculated by the flipper (you in my example) prior to fully purchasing the house. The flipper would know the Purchase Price, the Rehab costs from his contractor, and the estimated ARV Sales Price. The flipper likely would use a Hard Money Loan to cover the majority of expenses (80% of purchase price + 100% of rehab for example). The flipper then knows what his commitment is to be (approximately 20% of the purchase price + holding costs). THIS number is what's used for their ROI calculations, as it is the Cash on Cash ROI, or what the flipper will make based on what he actually spends out of his pocket (not the entire cost of the project, as it is leveraged with a HML). Hope this helps. Let me know if you need further explanation.

Don Harris · Answer

@Joe Schaak sometimes an investor will offer a 10% fee for the use of borrowed funds for six   Months. (Usually a small loan 25-75k). That equates to a 20% annualized return.

Joe Schaak · Answer

@Jason Hirko@Ben Stoodley Thanks for the responses about the joint venture scenarios. Can you explain the advantages of a JV situation as opposed to interest & points? For the investor, it seems the interest & points is a more secure deal because, if the rehabber runs over budget, their returns are still locked. Is the JV deal preferable for the rehabber for the same reasons? I understand that carrying costs and initial margin on the deal would be much higher. Is a JV deal more common? Thanks for your insights.

Joe Schaak · Answer

Okay. Pretty simple calculations, I see. What type of rates are people seeing for private money loans currently?

Jason Hirko · Answer

@Joe Schack they may also be talking about JV returns instead of loan returns. For example, you lend $100k in exchange for 50% of the profits, and the project nets $50k, the private money gets $25k, or 25% return. It's not guaranteed though, which is why they are 'offering' more

Joe Schaak · Answer

@Don Harris Thank you. So, if its an 8-month loan at 12%, I would take the percentage rate (12) divided by the term (8) and then multiply by 12 for the annualized return, correct? What if there are points up front? How would that be calculated in to the annualized return?

How To Calculate Return on Money

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