Kicked in the Gut (and wallet) by Hard Money

Hot off the presses!

I just heard the most astounding thing: a very reliable source told me that hard money lenders have begun charging 10 points and 20% interest.

Whoa...

Guess it's time to be a hard money lender, right? Who doesn't want to make cheddar like that? Geez. I'm gonna kill my guidance counselor!

Anyway, what astounds me the most about this is that these loans are closing. And, I'm assuming the transactions are complicit, because I haven't seen anything in the news about guns being put to the heads of the real estate investors who are taking these loan terms.

I'd love to pay a shrink to analyze the psyche of the investors who are taking out these loans. You know what I would bet they would find?

1. Lack of knowledge

2. Laziness

Let's explore this for a second in an attempt to get to the bottom of this masochistic practice.

If you don't know what you don't know - meaning, you don't know about private money so you get hard money at loan shark rates - then you have be let off the hook, until after you read this post. After that, there's no excuse except for...

Laziness.

This is what I want to tell real estate investors who are willing to pay hard money rates when there is so much private money available. If you can get a deal that a hard money lender will finance, then you can darn well get private money. Private money is going to cost you far less than hard money. Since profits are the name of the game, I'm not sure why people want to flush money down the toilet. Maybe they want to see what money looks like as it swirls the drain. (you know, in Australia the water swirls the other way...)

Here's  quick look at a deal and how much higher costs of funds impact you:

Property Cost (incl. rehab): $150,000

Hard Money Points (10 pts): $15,000

Holding Time: 2 months

Cost of Funds(20% x 2 mos): $5,000

Total Paid to Hard Money Lender: $20,000

Annualized Cost of Borrowing: 80%

Now, consider this same deal with a private investor:

Property Cost (incl. rehab): $150,000

Investor Gets: 10% per Year

Points (10 pts): $0

Holding Time: 2 months

Total Paid to Investor: $2,500

Annualized Cost of Borrowing: 10%

The difference between hard money and private money on this deal is $17,500!

That's NO CHUMP CHANGE.

If $17,500 (per deal,mind you) isn't enough to get your started toward raising private money, I'm not sure you belong in business.

Business is about making profits - as much as you can as fast as you can. It's your job as an entrepreneur to learn how to and to go about maximizing your business ROI.

For instance, take some of that $17,500 (from the example above) you are saving by using private investors instead of hard money and invest in some learning and implementation for getting private money. Even if you spent a few grand on educating yourself on how to find private investors and put together deals as well as marketing for investors you would still be wayyyyyy ahead.

Think about it.

If you want to pay 10 points and 20% (or even 5 points and 15%) for your deal funding, then I don't want to pay your shrink bill.