Hard Money vs Private Money and How It Works
Hello again fellowinvestors! With the explosion of the “Asset Based Lending,” there is so much built around the theory of using other people’s money to invest. This process can be applied to Fix and Flips or Buy and Holds.
You will want to have your planned exit strategy in place prior to embarking on a specific property, or loan options. My team and I have come across many questions on the process of borrowing in these scenarios and what it looks like from a cost perspective when borrowing money to purchase and renovate a property.
If you’re curious what the differences are between Hard Money and Private Money please take a few minutes and read my entry “Hard money vs Private Money and why I need it?”
Ok let’s get back at it…We believe the best way to visualize the process and costs of these previously mentioned scenarios is in the form of a Case Study.
So lets say Jim found a distressed property, and got the property under contract to purchase.
Purchase Price – $250,000 After Repair Value – $500,000
Renovation – $100,000
Estimated Closing Cost – $15,000
Total Money Needed – $365,000
Jim called and has qualified both with a Private Money Lender (PML) and a Hard Money Lender (HML) for 70% of the After Repair Value (ARV) at an interest rate of 10.99% (Interest Only). Keep in mind the PML Jim is using does not charge JUNK Fees. If you know, you know!
Month 1 PML HML
Day 1 Loan Balance $250,000 $250,000
Day 1 Payment $2,290 $3,205*
Difference -$915 +$915
Actual Rate 10.99% 15.38%
*Based on $350,000 loan amount, not actual outstanding loan balance.
Now 30 days have passed and Jim is looking to complete a draw request to be reimbursed for the $25,000 in work he and his team completed for the renovations. See more info here on my blog The Draw Process, the single most important factor associated with a hard money/private money loan?
Everything went well and of course Jim received his cash. How did this change the affect on his payments?
Month 2 PML HML
Day 1 Loan Balance $275,000 $275,000
Day 1 Payment $2,519 $3,205*
Difference -$686 +$686
Actual Rate 10.99% 13.99%
Inspection Fees $0 $200
*Based on $350,000 loan amount, not actual outstanding loan balance.
Now 60 days have passed and Jim is looking to complete a draw request to be reimbursed for the $25,000 in work he and his team completed. Yep you guessed it; everything went well and of course Jim received his cash. How did this change the affect on his payments?
***DRUM ROLL***
Month 3 PML HML
Day 1 Loan Balance $300,000 $300,000
Day 1 Payment $2,748 $3,205*
Difference -$457 +$457
Actual Rate 10.99% 12.82%
Inspection Fees $0 $200
*Based on $350,000 loan amount, not actual outstanding loan balance.
Lets do a quick update on the cost after three months… $2,458 is the difference between PML and HML. WHAO!! EKK, Let’s keep going.
It’s now been 90 days down the road and Jim is looking to complete a draw request to be reimbursed for the $25,000 in work he and his team completed. Jim and his team are awesome, so everything went well and of course Jim received his cash. How did this change the affect on his payments?
***DRUM ROLL*** Ok you do not have to actual do it. 😊
Month 4 PML HML
Day 1 Loan Balance $325,000 $325,000
Day 1 Payment $2,976 $3,205*
Difference -$229 +$229
Actual Rate 10.99% 11.83%
Inspection Fees $0 $200
*Based on $350,000 loan amount, not actual outstanding loan balance.
You can really see the difference, so let’s fast-forward to the last draw.
Jim is 120 days down and has completed the project. Of course, Jim is looking to complete a draw request to get reimbursed for the $25,000 in work he and his team completed. Jim and his team rock through this in 120 days, and Jim received his cash. How did this change the affect on his payments?
Month 5 PML HML
Day 1 Loan Balance $350,000 $350,000
Day 1 Payment $3,205 $3,205*
Difference $0 $0
Actual Rate 10.99% 10.99%
Inspection Fees $0 $200
*Based on $350,000 loan amount, not actual outstanding loan balance.
All said and done the PML saved Jim $3,087! Jim sold the property (stay tuned for my next blog on buy and hold after the renovation is complete). YAY JIM! Let’s add in the pay off request…… $75.
This brings the total to $3,162 in JUNK fees Jim would have paid with a HML and a true rate of 13.02%.
Consider all factors when making these decisions as a wise person once told me “bad financing will always ruin a good deal.”
If you’re ready to walk through real-life numbers on your investment properties or strategies, give us a call at Blink and let’s help you start to put your money to work for you even more.
