If you’re getting a great deal, a quick closing might be worth the high price of a hard money loan. Hard money loans are key when availability is more important than cost. Yes, banks charge less, but they require much more. We base our hard money loans almost exclusively on the value of the property. We will also use the fixed-up or as-built value of the property to evaluate your loan.
What if you only needed $7,500 to renovate a half million dollar house and make $115,000 profit? It’s possible with hard money. You don’t even need the $7,500 up front. Cash required in this case? Come to your closing with $0 and start monthly interest payments 90 days into the project.
Here’s an example.
Charles has a house under contract in 78704 for $250,000. It needs $75,000 in repairs and will conservatively sell for $500,000 once it’s fixed up.
- Conservative resale value: $500,000
- Contract purchase price: $250,000
- Repair budget: $75,000
- Loan request [purchase + renovations]: $325,000
- 70% of retail/maximum allowable loan: $350,000
- 4 points: $14,000
- 13% interest, interest-only monthly payments: $3,791.66
- $25,000 in closing costs and/or interest payments may be rolled into the loan
- $0 required at closing (costs rolled into the loan)
- $0 interest for 3 months (prepaid at closing)
- Projected profit with 5-month turnaround from closing to closing: $115,000
If everything goes according to plan, after paying 4% in real estate commissions, 1% in closing costs, 5 months of hard money interest, about $3,000 in Austin property taxes and $1,000 for insurance, Charles nets more than $115,000 on the deal.
Charles only has to make 2 interest payments if he finishes the remodel and closes the sale in 5 months. That’s an out-of-pocket cost of only $7,500 to make $115,000 profit and control a house worth half a million dollars. That’s serious leverage.
The points and interest on the hard money loan in this example total $30,604.15. Yes, it’s more than a bank would charge. Are you upset about that cost if you’ve just made $115,000 with only $7,000 out of pocket? Would you feel the same way about the cost of the countertops or roof repairs? Don’t be afraid to spend money to make money.
Keep your eye on the prize and know when hard money makes sense. Banks charge less, but they take longer, require more of the borrower and typically require a cash down payment. Think about hard money as an asset, not an expense. Hard money allows you maximum leverage with minimum cash and closing in days instead of weeks.
Contact us today if you have a deal under contract that may qualify for our hard money loan program. Remember, the hard part about real estate investing is finding the deals, not the money. Borrowing money to make money is an incredible opportunity available with hard money loans.