Hard Money Profits

Do hard money loans, and you get a high return on your money. You have to do it properly to be sure, of course. You also need a lot of money to invest to do this. 

What is "hard money" loans? They are short term loans (usually 24 months or less) real estate investors, usually allowing them to buy and rehab a property. There is often a loan fee of as much as five percent or more of the loan amount, and up to fifteen percent or more annual interest. Why anyone wants these loans? 

Hard money means speed and simplicity. When using hard money lenders can an investor tell a seller "We can close for cash in a week." It is the seller's attention, especially if he has had offers that fell through due to financing contingencies. 

Hard Money - How it works

An investor can generally borrow 65% to 70% of property value, but not only the current value. As a hard money lender will lend you money based on ARV, or "after repair value" (as determined by your appraiser). You look at the property more than credit scores, a second reason why investors will come to you. Let us look at an example. 

An investor takes a beat-up house, he can buy for $ 105,000. He has a plan when complete will bring it up to a market value of $ 182,000. He figures it will take one month to implement, and two more months to sell it. He comes to you and you agree that he seems reasonable. Your appraiser estimates a $ 186,000 market value once the project is finished. 

You agree to loan him 65% of ARV, which amounts to $ 120,250. The excess than $ 105,000 purchase price (approx. $ 15,000) goes into an escrow account to be distributed as repairs begin. Note that if the investor keeps its costs down, he can do this whole project without any of his own money invested. 

The 4% loan fee you charge is $ 4,810, and added to the loan balance so that the investor owes you a total of $ 125,060. You are charging him 15% interest, and he can pay only the interest due each month, but the entire balance due within a year. If it takes longer than that and you have confidence in his plan, you can extend the loan after that. 

For the sake of our example, we will assume that it takes two months to complete the house, and two months to sell it. The investor will have $ 181,000 for it. He paid $ 105,000, and he made a profit of $ 31,000 for a total of $ 45,000 for all his expenses. he is happy. Let us now look at what some of these "costs" went for you. 

You had the buyer pay for the assessment and any other costs of closing the loan, so your total investment was $ 120,250. That was back when the house is sold, together with the loan fee of $ 4,810. You can also collected four months interest on the entire balance of $ 125,060 (loan and fees, which also was financed), which totals $ 6,253. Your total profit was then $ 11,063 on a four-month investment of $ 120,250. It is an annual return of 27.6%. How many banks do that on their loans? 

Does it seem like a lot for the investor to pay? Well it is, but the interest and other fees are irrelevant if they allow him to make a good profit. Remember, he is $ 31,000 after paying such expenses. In any event, it makes sense that hard money lenders get paid well to take risks that banks will not take. If he screwed up the project, stopped paying, and you had to exclude, you can sell half finished house for just enough to get your money back. 

Assume that you hold most of your money out there in these types of loans. Because not all invested all the time and makes only 5% of the bank, you average just a 18% return. What does it do to a $ 200,000 investment portfolio in 12 years? That makes it 1.6 million U.S. dollars. You can see why some real estate investors with cash to make hard money loans.