Private and Hard Money Lender Payments

[Robert Walden]

Years ago, I did several successful fix-and-flips. But, I financed the deals using my own bank account, credit cards and family loans. I never used private lenders or hard money sources. Now that I'm retired, and venturing back into real estate investing, I plan to use OPM to finance my deals. I have a fix-and-flip under contract, and am shopping for investors. However, I'm unfamiliar with either private or hard money loans. I'm not sure what I'm doing, and don't want to make a bad deal. I've been reading about these two financing methods on Bigger Pockets and elsewhere. But, the articles use a lot of terminology, without much practical ABCs and step-by-steps for how to select and structure the loan. I still have a few important questions before I settle on a funding source. Hopefully, somebody can help me figure this out so that I make the best decision.

Thanks for your help!
          :-)

Questions:

1.  What is the repayment schedule in a 100% financing deal? When are payments made to the lender, and how much?

2.  What does "interest only" mean? Does that mean you only pay the interest, and no points? Does it mean you pay the interest monthly (throughout the reno as part of your holding costs)? Can you pay it in a lump sum along with the principal at the resale, or the re-fi cash-out?

3.  I've read that some lenders allow you to roll the points into the principal. But, you'll pay interest on the points, which decreases your profit. I get that many lenders want some of the investor's skin in the game. But, if the goal is to use OPM, why would you want to put any of your own money in a deal if you can find a 100% finance lender? How do you weigh whether its better to accept fewer points (and how many fewer) for a 65-75% loan, vs. probably paying more points and higher interest for a 100% loan?

4.  How do you determine the cost of a loan over time, and how it affects profitability?

[Jeff Copeland]

Pretty much everything you're asking is negotiable, and can differ from lender to lender, or from loan to loan. 

That being said, something along the line of 3 points and 12% interest only for one year are pretty common hard money terms. 

One a $100k loan amount, that would look like:

$3,000 (points) paid to the lender at closing.

Monthly interest payments of $1000/mo ($100k loan amount x 12% = $12k in interest annually, divided by 12 months). 

Note: Interest Only means exactly that - you are only paying the interest on the loan, no principal, and you will still owe $100k in principal at the end of the 12 months. 

If you carry the note to the full term of 12 months, your total cost of financing is $15k ($3k in points, and $12k in interest payments). 

Some lenders will roll the points into the note. This just means you don't pay the $3k at closing. Instead, the loan amount is $100k, but the principal amount to be paid off is $103k. (This would increase your monthly payment by $30, using the same math above).

Some lenders will allow no payments, and just let the interest accrue and be paid when the note is paid off. 

Neither of these last two options really changes the total financing cost by much - Just the timing of the payments. 

In this scenario, you'd need to factor $15k (or $15,360) worth of financing costs into the analysis of your deal. 

Note that there will likely be other origination and closing costs associated with the loan: Someone (usually the borrower) has to pay an attorney to prepare the mortgage, promissory note, and other related documents (LLC affidavits, amortization schedules, etc), and pay for title and recording fees associated with the loan. This is no different from a standard mortgage - the borrower normally pays the costs associated with the mortgage.