how expensive is hard money?

5 Replies

say they are offering 4 points with 12% interest on a hard money loan and they are offering 70% of arv.

this SFR is worth 300k ARV. Im purchasing it for 170k. Now how do the costs lay out? i pay those 4 points up front or at the end of closing? and how much would my interest only payments be?

i know its a dumb question, im just trying to figure out how much money i would need to get a hard money loan

If you purchase it for $170000 you would need 30% or $51000 plus 4 points on $119000 or $4760 plus closing cost.  The monthly payment for $119000 at 12% interest only would be $1190. Some lenders want points up front some will let you pay on the back end some will allow a split

Assuming: 6 mo hold, $210,000 loan (70% of ARV), 4 pts paid upfront (usually the case with HML), $2,100/mo I/O interest pmt.

$  8,400 (4% of $210k)

$12,600 ($2,100*6)

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$21,000  Total cost of capital

@Devin Mann

You didn't mention what the loan-to-cost (LTC) is, which is the cost of the acquisition price and rehab. In addition to LTV (which is usually based on ARV), hard money lenders lend up to 80%-95% LTC.

Some lenders will also roll the points into the loan (and paid at the end instead of upfront), but most prefer to have it paid up front.

Typically I recommend you set aside 20-30% of the total costs of the loan.  This would not only cover the down payment, but any closing costs, upfront points, prepaid insurance, etc.  Then lenders also want to see that you have at least 6 months of interest payments available in the bank, and some money to start the rehab.  Lenders will finance rehab, but it's done in reimbursements, so they will give you money in draws as the work gets completed.

Different lenders work differently. Assuming the lender you're talking with will lend you 70% of ARV even if that's more than the purchase price (e.g., to cover the rehab cost) you could borrow $210,000, as @David C. says.  The four points, $8400, comes off the top, leaving you loan proceeds of $201,600.   You would have closing costs around 2% of the purchase price, or $3,400.  So, after closing costs plus purchase price you have $28,200.   Assuming that's rehab budget, the lender would typically hold all or most of that back and give it to you as the work progresses and is inspected.  You would have to make monthly payments of 1% of the amount borrowed or $2100 per month.  When you pay off the loan, you pay back the $210,000.

My rule of thumb is that with terms like these, if your purchase plus rehab cost is 70% of ARV then you need about 15% of ARV in your own cash to complete the deal. One of your worst possibilities is that you run out of cash. Hard money lenders aren't likely to "work something out". If you stop making payments or can't pay it off as agreed they're going to take the property and you will lose whatever you have invested.

Again, though, you need to discuss it with your specific lender and get them to outline exactly how they work.  Terms vary widely.

Last thing a reputable HML wants to do is take the property, so they can work with you to get the job done.

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