Hard Money Loans/Lenders Calculations

[Duriel Taylor]

Hello All, 

I hope all is well. As I pursue the word of real estate, I have become more curious with hard money loans. Unfortunately, I do not understand the numbers. Now I do understand the logic and their purpose, I simply do not understand their calculations. For example, they mention we will give you up to 75% of the ARV. From my understanding, the numbers will be as such; asking price is 55k, ARV is 100k, rehab is 20k, and closing cost is 5k. Now 75% is of 100,000 is 75,000. Here is where the confusion come for me; when they say points, lender fee, etc. I simply want to understand how to budget monthly during the rehab stage while making the payments. Also I would like to use all the approved funds case in point 200k, I would withdraw all the available funds and use enough for the deal(s) and leave enough left to pay the monthly payments in case the rehab(s) take longer than anticipated. Also, what would the numbers look like if I attempt to do multiple flips at once? At your earliest please give me your thought.

PS: all my long winded/typers I welcome as much details and or examples as you can.

Regards,

[Mike H.]

Here's how a typical hard money loan would work
1) Assume lender is going to charge 4 points, 12% interest and 70% of ARV (I don't know many that go up to 75% ARV - but I'm guessing some do).

2) Purchase price of a house is 50k. Rehab is 20k. ARV (after repairs, the house is estimated to be worth 100k). So you're right there at 70% ARV. Hard money lender will lend you 70k total.

3) At the closing, hard money lender will wire the seller 50k for the purchase minus their points and closing costs. Assume closing costs at 2k. Points are based on the 70k total loan so points will be 2,800.

The lenders wire will be 50k minus 2,800.
You will have to come up with the 2,800 for points and the 2k in closing costs in order to close. So 4,800. You will, however, get the property tax credit so that will offset the 4,800 somewhat - depending on your prorated tax credit. 

4) Lets say the tax credit is 3k. You will now own the house for 4,800 minus 3k or 1,800 out of your pocket. And you will have a loan of 70k on the home. AND you will have an escrow account for rehab that the hard money lender will be holding of 20k.

Here is where some hard money lenders are different - rehab escrow. Some actually will front some of the rehab escrow. Some will require you to do a portion of the work and then put in for the draw.

But in the latter, you would complete roughly 10k in rehab work and then submit for a draw where the hard money lender will send you 10k of your rehab escrow money. Then you would spend another 10k to complete the remaining work and then submit for your draw to get reimbursed for that.

Your monthly payments would be $700 per month interest only while you're doing the rehab.

So lets say your rehab takes 2 months.

You will come out of pocket roughly 1,800 to buy the house. And then another 10k to 12k to front the rehab. Note that sometimes you have to spend more than 10k in order to have 10k of stuff completed.  But you may also be able to push the contractor off some of their payment until you get the draw reimbursement. Usually, they can turn those draws around in a couple of days.

Then 2 months of interest (1,400) plus 2 months of utilities (400 to 500 total). And that should get it done. Then you'll get your draw reimbursement as well.

From there, get a renter in there so they're paying your interest and utilities and you'll get all your rehab escrow back.  So you're final out of pocket will be:

a) $1,800 for the purchase
b) $1,400 for two months of interest

c) $500 for two months of utilities

4k total and you now own a rental house........