The missing print in Hard Money Lenders Ad

[James Kandasamy]

BPers,

                        Not all hard money lenders cost structures are the same. From my experience of working with 3 different hard money lenders , I have discovered a key hidden cost structure that only a few would realize and not advertised. Most of the time, many investors both newbies and seasoned does not realize this until you work with different hard money lenders and discover inconsistencies among them. If you are not aware of this cost, it can cost you a few thousands of dollars in your real estate endeavors. It’s important for you to know this unadvertised charges as part of your hard money lenders selection criteria

                        The cost that I am talking about is the interest charges to "pre-drawn" rehab funds. Assume that you buying a 50k house with 30K rehab cost. Your total hard money in the deal is 80K.  The criteria that almost all hard money lenders requires is that the draws are made after the work is completed.  On the day you close, you hard money lending loan is 50K and the remaining 30K will be made is few draw cycles as the rehab progresses.Lets assume your rehab requires a period of 2 months with 50% (draw of 30K / 2 = 15K) project completion on 1st month and another 50% (draw of 30K / 2 = 15K) on the 2nd month. What I found out is that there are two type of lenders that charges interest differently.

• Lender A would charge interest on total purchase + rehab amount from day 1 after closing till you get out of their financing.
• Lender B  would charge interested on purchase amount on day 1  but would adjust the loan amount interest based on draws amount.  To clarify Lender B would charge 50K+ 15K ( 30k divide by 2) at the end 1st month and 50K + 30K on second month.

 If you have gone with the lender A, you would have paid interest on 30K for 2 months even without having the money work for you. If a lender charges 14% interest, that would be a $700 extra interest that you have paid them for a money that you have not used during rehab phase.

Imagine if its higher interest or the rehab spans across 3-6 months or the rehab cost is 30-50K …. It can be thousands of dollars.  

Why we should pay that if the money is not drawn out ?

James

[Account Closed]

There are other considerations too. For instance some HMLs charge a pre-payment penalty while others don't. Some HMLs charge a due diligence aka upfront fee to review the deal. Others have draw inspection fees. Points and interest can vary depending upon the area of the country you're in or the subject property is located. 

All this said at the end of the day leverage is the name of the game in real estate investing. Many investors would say the ability to leverage OPM if the investor doesn't have the entire amount of funds needed for the deal is worth more than saving some interest or fees but not doing the deal to begin with.  HMLs often provide the type of financing banks do not (such as rehab loans) to real estate investors, and usually without much U/W or qualifying. Plus, the goal is not to keep it long, you want to get in, get out, make your money and move on. Regardless the type of financing you don't want to keep it longer than needed.