Hard-Money loans are usually short-term and based mostly on the merits of the real estate deal. A hard-money lender looks primarily at the equity position in the deal and not at the borrower’s credibility (credit) like with traditional lending and banks.
Hard-money lenders can also be institutions, meaning they broker other people’s money. In this article, I’m going to get super nerdy so get out your calculator!
When you are considering presenting a deal to a hard money or private lender for short term financing you should “present” the deal to them highlighting the most important information for them.
Key Hard Money Lenders Terms
Here are the things a hard-money lender usually looks at:
- LTV: Since they want to make sure they have a solid equity position, they look at loan-to-value. Typically it’s 65%, meaning they’ll loan 65% of the value (35% equity).
- Points: Hard-money lenders typically charge points. What are points? One point is equal to one percent of the loan amount, and it’s paid either up front or it’s paid at the end (when the loan is paid back).
- Interest: Interest rates typically can range from 8–18% and are usually interest-only, annualized and paid monthly. Some hard-money lenders have 1–2% of the loan amount paid monthly. To calculate, take the loan amount and multiply it by 1% to get your monthly payment. This payment structure is easier to calculate (examples will follow).
- Length of Loan: Hard-money loans are short-term loans that typically range from three to nine months. Keep in mind, the hard-money lender wants you to get in and out of the deal quickly so he can re-lend the money again to somebody else and charge points all over again.
- Extension Fee: Typically there’s an extension fee, meaning if you go past the length of the loan, there’s a fee (flat fee or points) to pay for that extension.
- Prepayment Penalty: Some hard-money lenders have a prepayment penalty of three months. So if you pay back the loan early, you are penalized.
- Time to Close: Most hard-money lenders need two to three weeks notice in order to be ready to close on a deal. So when you’re making offers, make sure you’ve got enough time for the hard-money lender to get everything ready by the date of the closing.
- Miscellaneous Fees: Usually there are “miscellaneous fees.” I call these “junk fees,” which could include document prep fee, a recording fee, appraisal fee, a lawyer fee (to draft all the docs), etc.
The only way to really understand how the numbers work is to practice doing the calculations. I’ve broken it down in to 4 steps…
Let’s say the ARV is $200,000. The length of the loan is 120 days (that’s how long the hard-money lender is going to do the deal for). The loan-to-value (LTV) is 65%. Points are four points and they’re paid up front. The interest rate is 15% annualized, interest-only and paid monthly. There’s $500 in miscellaneous fees. And there’s a $1,000 extension fee per month until it’s paid off. The turnaround time on this deal is 120 days (it takes 120 days from start to finish to do the deal). What is the total carrying cost?
ARV – $200,000
Length – 120 days
LTV – 65%
Points – 4 (paid up front)
Interest – 15% (annualized, interest-only, paid monthly)
Misc Fee – $500
Ext. Fee – $1,000 (per month)
Turnaround – 120 days
Step 1: Determine LTV: The first thing to do is determine the LTV. Since the ARV is $200,000, multiply it by .65, which is $130,000. This is the total amount that this hard-money lender is willing to lend on this particular deal.
$200,000 x .65 = $130,000 LTV
Step 2: Calculate Points: One point is equal to 1% of the loan amount. Take $130,000 and multiply it by 4 points, which equals $5,200.
$130,000 x .04 = $5,200 points
Step 3: Calculate Interest: There are three steps to calculate interest. First, take $130,000 and multiply it by .15, which equals $19,500. Now that’s the annual interest. Next, take the annual interest and calculate the daily interest by taking $19,500 divided by 365, which is $54.17 as the daily interest rate. Since the total time doing this deals is120 days (total turnaround), take $54.17 x 120 days to get $6,411 as the total interest paid.
$130,000 x .15 = $19,500 annual interest
$19,500 / 365 = $53.42 daily interest
$53.42 x 120 days = $6,411 total interest paid
Step 4: Add Up Fees: Add $5,200 for points, $6,411 for interest and $500 for miscellaneous fees, which equals $12,111 total carrying costs.
+ $5,200 points
+ $6,411 interest
+ $500 misc. fees
= $12,111 total carrying costs
Learning How to Calculate Real Estate Deal Numbers
Now, let’s spend some time doing several examples so you can practice calculating the numbers.
Breakout Session #1
Let’s say that the ARV is $140,000. The length of this loan is six months. The LTV is 65%. Points are five (paid up front). Interest is 13% (annualized, interest-only, paid monthly). Miscellaneous fee of $750 (paid up front) and the total turnaround time is 120 days. What are the total carrying costs? How much are the up-front fees?
ARV – $140,000
Length – 6 months
LTV – 65%
Points – 5 (paid up front)
Interest – 13% (annualized, interest-only, paid monthly)
Misc Fee – $750
Ext. Fee – $1,000 (per month)
Turnaround – 120 days
Stop right now and work out the numbers. Take the time to do this exercise before going any further. It’s very important that you understand how hard money works.
Answers: Breakout Session #1:
Step 1 – Determine LTV: Multiply $140,000 by .65, which equals $91,000.
$140,000 x .65 = $91,000 LTV
Step 2 – Calculate Points: Multiply $91,000 by .05, which equals $4,550.
$91,000 x .05 = $4,550 total points
Step 3 – Calculate Interest: First multiply $91,000 by .13, which equals $11,830 in annual interest. Next, divide $11,830 by 365, which equals $32.41 in daily interest. Finally, multiply $32.41 by 120 days, which equals $3,889 in total interest.
$91,000 x .13 = $11,830 annual interest
$11,830 / 365 = $32.41 daily interest
$32.41 x 120 = $3,889 total project interest
Step 4 – Add Up Fees: Add $4,550 in points, $3,943 in interest and $750 in miscellaneous fees, to get $9,243 total carrying cost on this deal.
+ $4,500 points
+ $3,889 interest
+ $750 misc fees
= $9,139 total carrying costs
Up-front costs include $4,550 (points) and $750 (misc. fees), for a total of $5,300 paid up front to do this deal.
= $5,300 total paid up front
Breakout Session #2
ARV is $315,000. The length of the loan is 4 months. LTV is 70%. Points are 5 and paid at the end (when loan is paid off). Interest is 1.5% monthly, interest-only. Miscellaneous fees are $950, paid up front. There’s an extension fee of 1 point per month and that’s paid at the end. The total turnaround time is 5 months. What is the total carrying cost and how much is paid up front?
Length 4 months
Points 5 (paid up front)
Interest 1.5% (monthly, interest-only)
Misc Fee $950
Ext. Fee 1 point per month (paid at end)
Turnaround 5 months
Stop right now and do this exercise.
Answers: Breakout Session #2:
Step 1 – Determine LTV: Multiply $315,000 by .70 (not .65), which equals $220,500.
$315,000 x .70 = $220,000 LTV
Step 2 – Calculate Points: Multiply $220,500 by .05, which equals $11,025.
$220,000 x .05 = $11,025 points
Step 3 – Calculate Interest: This is done a little differently. Multiply $222,500 by .015 because remember…it was 1.5% monthly. Move the decimal place two places and that gives $3,308 as the monthly interest. Since this deal was for five months, multiply $3,308 by 5, which equals $16,540 as the total interest paid on this deal.
$220,000 x .015 = $3,308 monthly interest
$3,308 x 5 months = $16,540 total interest
Step 4 – Calculate Extension Fee: Since this was a 4-month loan and it went 5 months, there is an extension fee owed. The extension fee was 1% of the loan amount. Multiply $220,500 by .01, which equals $2,205 as the extension fee.
$220,500 x .01 = $2,205 extension fee
Step 5 – Add Up the Fees: Add $11,025 in points, $16,540 in interest, $2205 in extension fees and $950 in miscellaneous fees, which equals $30,720 as the total carrying costs.
= $30,720 total carrying costs
The miscellaneous fee of $950 is paid up front. The points and the extension fee are paid at the end and, of course, the interest is paid each month.
How to Communicate with Hard Money Lenders
Interview: When considering a hard-money lender, the more intelligent (understand how it works) you sound, the better the interview will go. Here’s a list of questions to ask.
- Do you lend in my state? A lot of hard-money lenders are very state-specific because they have to get SEC compliant with each state they lend in.
- What is your loan to value? Sixty-five percent is typical but it may be higher or lower.
- Do you lend on the rehab funds? Some hard-money lenders will not lend on the rehab funds. If they do, how are draws handled? Typically they’re not going to give you all the money up front.What’s the interest rate? I’ve seen it range from 8% all the way up to 18%.
- What are the points? Are they paid up front or at the end?
- What are all the miscellaneous fees? If it’s $750, what does that go towards and is it paid up front or is it paid at the end?
- What’s the length of the loan and are there extension fees?
- How much notice do you need to close? When I bring a deal, how much time do you need before you can fund the deal?
- Can you provide me proof of funds? (Important for making offers). Most hard-money lenders understand what you’re doing and they can give you proof of funds.
- How long are these terms good for? I like to ask this question because some hard-money lenders will tell you one thing on the phone and then at the time of doing the deal, they have different rates or terms all together. Ask to get it in writing. Typically, they’ll give you something in writing that’s good for 30 days.
- How many deals will you do with me at a time? Do you do one deal at a time, two deals, three deals, etc.?
- What is the procedure to present a deal? Ask, “What do I need to do to present a deal to you for review?”
Cost of Doing Business: Many investors consider hard-money fees as too high and don’t realize it’s simply a cost of doing business. For example, in breakout session #2 above, hard money fees were $30,000, which seems like a lot.
But here’s the right way to look at it: How much are you making by doing the deal? In that example, if you’re following the fix and flip 70% formula, your profit should be 18%, which is approximately $57,000! So if you focus on the profit, the $30,000 for hard money becomes just a cost of doing business. At the same time, look at it and say, “I’m really motivated now to raise private money at lower rates because I’ll put so much more in my pocket.”