Hard Money Lenders - What % is too high?

Question

I understand that hard money lenders have high interest rates and points.  I get it....they are taking most of the risks.  But what interest rate would you consider just too high?

Jeff Rabinowitz · Answer

What is the deal worth to you?  What are you willing to work for?  Some may want to clear $5K to make the deal worth doing, others will demand $20K or $50K.  Determine that figure for yourself.  Then see if the loan rate and terms you can find will get you to that figure.  If your number is $10k and you find a deal that will return $15K to you what difference does it make what the interest rate is?  If you walk away from the deal you walked away from $15K.

Simon W. · Answer

You need to calculate if it will cut into your profits like crazy. If you have a hard time getting a lender with low interest-rate, than a higher interest rate might be for you if you really need to get a loan.

It all comes down to working out the numbers and if you would be satisfy with the result.

Chris Hill · Answer

Thanks for the feedback everyone!  Great points.  Its good to look at situations from different perspectives

Mike H. · Answer

To me, a fair rate comes down to what the market will bear. If there are 3 or 4 good lenders at 12% and somebody else is at 18%, then 18% is too high.  If everybody else is at 14% and the lender is at 16% then maybe thats not too high.  Its all relative.

One thing to keep in mind when evaluating a lender's rates. Rates are not terms. You need to evaluate the hard money lender's TERMS.  Rate, points, fees, LTV, etc.

Ultimately, you should be comparing the lender's terms against other lenders' terms and then analyzing the overall costs of each loan. That will tell you whether the lender is fair or not. And it may also depend on a hidden value that is worth paying extra for.

Example: Lender A will lend 90% of the ARV. Charges 5pts and 10% interest.Lender B will lend 90% of the ARV. Charges 4pts and 12% interest.Lender C will lend 100% of the ARV. Charges 4pts and 14% interest.

If preserving your capital is important to you, then you may choose Lender C.You may pay an additional 2% interest. But save on the out of pocket.

On a 100k loan, your payments would be $166 more a month with Lender C than with Lender B. But Lender B would require you put down 10k to do the deal. Lender C would cover all of it so you would save 10k out of pocket costs.

That 10k isn't a fee so its not like its an added expense. You'll only owe 90k. But the point is you'll have to come out of pocket that 10k.  After doing a couple deals and coming out of pocket 10k, eventually, you're going to run out of money.....

One other thing. the above scenario is also a good example of why you need to look at the terms instead of just the rate to compare lenders.

Comparing Lender A with Lender B, 10% is better than 12% but Lender B may be the better option depending on how long you think you'll be holding the property.

If its a 3 month hold, then Lender B is the better option. 12 months, then A would be better in the long run.

Again, its more important to compare the terms than it is just to look at the rate.

That being said. I wouldn't pay more than 14%.  :-)

Samuel DeMass · Answer

Chris,

I'm sure others will join me in frustrating you when I say; it depends.

Disclaimer: I'm not a flipper, which is why I assume you're using hard money.  I just figured I'd share my philosophy.

Like anything that involves money, I'm a huge fan of doing the math.  It is simple, but often overlooked.  After accounting for ALL of your expenses, planning for your worst exit strategy, you'll know the interest rate is too high when your left in the red.

Hard Money Lenders - What % is too high?

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