Hard money loans generally have two cost components to consider:
- interest rate and
- up front points (1 point = 1% of the loan amount)
Interest rates on private money loans are higher because these loans represent a higher risk than the traditional lending institutions are willing to accept. In exchange for acceptance of this risk, hard money investors require a higher rate of return. The higher the risk, the higher the rate. In general, expect private money rates to start at 7 percent, probably most commonly 10 percent, and higher for unusual or higher risk deals.
Up front points are usually 3 points higher for private money loans than a bank would offer. Some loans can have as high as 10 points up front, depending on the risk. These points are paid to enhance the yield to the hard money investors and pay for the private money lending group's investment in time and resources to package the loan. The points will vary based on the loan amount. For example, there may be a 10 point charge on a small $50,000 private money loan, but a 3 point charge on a $500,000 loan.
One way to look at the cost of private money loans is to calculate how much it will cost you to not have the loan. For example, if you buy residential rehab real estate fixers and remodel them and you only have enough funds to buy and fix two homes every six months and earn $20,000 profit per home, your profit potential is maxed out at four deals a year, or $80,000 per year. If you were able to get a reasonable hard money rehab loan on each of those properties which gave you leverage to buy eight deals a year instead of four, your profit would double to $160,000. In simplistic terms, your cost in this case of not getting the loan is $80,000 provided all goes as planned.
Use our hard money investors directory to find lenders for your specific type of real estate project.