Hard money lenders continue to offer vital financial access to investors and business-people. There are many ways this alternative form of financing can improve your wealth.
Looking for hard money loan for your real estate investment? Are you worried about the costs? You might also be wondering, “How are hard money loans calculated?” Let's figure it out.
Transactional Funding Scenario
When it comes to transactional funding, investors get quick loans for urgent wholesale deals. Here’s an example:
You are a wholesaler and own a property worth $400,000. Assume this value is exclusive of closing costs i.e. tax, insurance, title, etc. As long as you have a ready buyer, a hard money lender can give you up to 100% of the buying price.
In about 1-3 days, you should be able to get the loan. No need for income verification, appraisal, or credit check. With 100% financing, you may be charged about 2% interest on the loan amount, following same-day closing.
This translates to $8,000 upon acquiring a hard money loan of $400,000. This is the base loan cost. Assume another 2% closing cost and a selling price of $425,000. You’d pocket $9,000 before taxes.
Fix and Flip/Rehab Funding Scenario
When you take a fix and flip deal, you can expect to pay around 3-6 points upfront. Most rehab lenders finance the repair cost but ask you for skin in the game. If you are looking forward to reselling the property in 6 months, the deal would look like this.
Purchase price = $400,000
ARV (After Repair Value) = $450,000
Cost of repair = $30,000
Skin in the game (down payment) = $40,000
Loan amount = $435,000 (90% of the purchase price + cost of repair)
3 points to the lender = $13,050 (3% of $435K)
Assuming 10% interest for 6 months = $21,750
Base loan cost = $13,050 + $21,750 = $34,800
Renovate and Rent it
So you want to renovate and rent out your property. Are you looking to expand your rental property? Repair costs can be tough.
You might want to find a lender who offers hard money loans. Later, you can refinance for better terms in the long run once the rentals have proven their performance. Here, you would incur similar costs as in the case of a fix and flip funding.
You would be required to hold the hard loan longer if you want to get good terms on a typical bank loan. Expect a cost of $34,800 for the first year. Note that refinancing comes with closing costs which could be 2% of the loan. Depending on the market condition, you can pay a new long-term interest rate of 4% – 7%.
If you sell $450,000 after one year, you would get a profit of $15,200 plus any rental income earned in the holding period.
In the present real estate industry, this form of alternative financing comes to your rescue. The harsh underwriting conditions for conventional loans may hinder you from acquiring quick capital. But a flexible funding source allows you to become a cash buyer.
Now you should understand the answer to, ‘what is hard money loan used for?’ You can quickly renovate your rentals, buy houses that require massive repairs, do back-to-back closing in a wholesale property sale, auction properties and so forth.
