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How Much Does It Cost To Borrow Hard Money? On today’s video, I’m going to break it down and show you step by step how to calculate the costs of hard money over the course of a deal so the next time you borrow hard money, you’ll know exactly how much it’s going to cost you.

Hard money as it’s called is unconventional financing commonly used for flipping houses and it’s a great way to get your deal quickly funded without having to qualify for traditional financing what’s so great about hard money for flipping houses is unlike traditional bank financing the criteria for funding is mostly the merits of the deal and not you personally as

A borrower the trade-off is it costs more and before you ever borrow hard money to do a deal it’s imperative you know how much it’s going to cost as that cost directly affects your profit on the deal so on today’s video we’re gonna nerd out on the math so get out your calculator and i’m gonna break down and show you step by step how to calculate the cost of hard

Money over the course of the deal so the next time you borrow hard money you’ll know exactly how much it’s gonna cost you all of that and more coming up hi it’s jerry norton and if you’re new here to make more money and less time flipping real estate so you can live your dream life subscribe to my channel click the bell i kind of get notified when new videos are

Released now cost of capital or what i call carrying cost is the total cost to borrow the funds to do a deal now my goal in the goal of most flippers is to borrow a hundred percent of the funds to flip a property now since it’s a short-term loan until i flip the property i pay the entire loan off once the property sells now i follow this same strategy of a hundred

Percent funding even on my multi-million dollar deals nothing beats making a six-figure profit on one deal in six to nine months with none of your own money in the deal now in the description i’ll put a link to a video where i show to six-figure flips i recently did with a hundred percent funding so unless you have hundreds of thousands of dollars sitting around

Borrowing capital to flip houses is essential but you have to understand the cost of that capital and factored into your formula as it’s a real cost and if you’re not careful that carrying costs can chew into your profits on deals really quickly so before we dive into the math you need to understand all of the fees associated with hard money fee number one is the

Interest you’ll pay on the loan now hard money loans are not amateur eyes dover time like typical long term loans which means you don’t pay down any principal so your payments are what we call interest only that means a hundred percent of the monthly payment is applied only to interest and as a flipper this is actually better because the payment each month is less

Than if the payment included principle and since it’s a short-term loan we’re not concerned with pain down principle now be sure to keep watching because i’m going to break down how to calculate the interest only payments and in case you’re wondering interest rates fluctuate depending on the market but as of this recording typical hard money interest is ten to twelve

Percent now fee number two is points a point is a lump sum amount charged by the lender just for doing the loan one point is equal to one percent of the loan amount so if the total hard money loan is a hundred thousand and the lender charges two points you would pay two thousand dollars in points which keep in mind is a separate fee it has nothing to do with the

Interest payments the third fee on top of points and interest is there are often other miscellaneous fees such as an origination fee a processing fee an application fee legal fees appraisal fees etc now i affectionately refer to all of these fees as junk fees and typically they range from $500 to $2,000 depending on the lender and the deal the fourth fee to be

Aware of is a long extension fee now since hard money is short term in the event you don’t exit the deal in time most hard money lenders will extend the loan for you for a fee for example if the hard money loan was for a six month term and you exceeded six months you would extend the loan for let’s say 90 more days for an additional two points now the fifth fee

To consider is inspection fees if you borrow not just capital for the purchase but also for repairs then every time you need a draw from the lender before releasing the funds they typically send out a third party inspector to verify that the work was completed prior to releasing the draw these fees usually cost $150 or so so if your total rehab budget was twenty

Five thousand and you did draws up five thousand and your inspection fee was $150 each you would pay seven hundred and fifty dollars in inspection fees now there’s one more thing that i want to review with you before diving into the numbers and that’s the typical lending criteria now there are two major considerations that hard money lenders look at the first is

What we call loan to value or ltv this means how much of the value of the property is the lender comfortable lending on lenders want equity in the deal in the event that you default and they have to foreclose and take the property back now typically as of this recording the hard money lenders will lend 70% of after repair value that means if the arv is a hundred

Thousand the most that that lender will lend is seventy percent or seventy thousand now as flippers this is fine since we should be buying at 70 percent anyways but ltv isn’t the only criteria the second consideration is loan to capital or how much of the total funds needed to buy the property and fix it up is the lender comfortable lending on now as this recording

Is typically 80 to 90 percent so that means if you’re buying the property for 50,000 and you need 20,000 in repairs for a total of 70,000 in capital and the lenders ltc loan the capital is 85% then they will only lend you fifty nine thousand five hundred they consider the other 15 percent or in this case ten thousand five hundred as skin in the game now if you’re

Like me when i first got started and you’re thinking yeah giri i don’t have ten thousand five hundred dollars of skin to put in the game then learn my hack strategy to get the other 15 percent funded watch this video to learn how okay so now that we’ve explained all of the typical fees and the lending criteria let’s go through a scenario so that you can see how

It plays out and how to add up all of the fees now i want you to know that the nerd in me is really excited to dive into the math listen i barely graduated high school and i hated math as a kid but this is money math and money math is a blast so let’s go through a case study together let’s say that you have a deal that needs funded assuming the following numbers

The arv is a hundred and forty three thousand the purchase is seventy-five thousand repairs our twenty five thousand for a total capital needed of a hundred thousand which is 70 percent of arv now the turnaround time on this deal is four months and the draws needed are eight draws so let’s assume the following terms from a hard money lender the loan to capital

Is eighty percent the term is a six-month loan interest is twelve percent interest only there are two points the miscellaneous fees are fifteen hundred dollars and there’s an extension fee of two points for an additional six months and inspection fees are eight hundred and seventy five dollars each okay now given all of that info and assuming that the deal takes

Four months to flip what are the total carrying cost so let’s break it down step number one is to calculate the total loan amount by taking the total capital needed of a hundred thousand times the lenders loan to capital which is eighty percent so a hundred thousand times 0.8 equals eighty thousand step two is to calculate the points which are two points from

The slender so the loan of 80 thousand times point zero two equals $1,600 in points step three is to calculate the interest and we’ve got a few steps here so first let’s get to a monthly rate and then we can multiply that by the number of months in the deal so if we take eighty thousand times 0.12 that equals 9600 dollars but that’s the total annual interest

So then let’s divide 9600 by 12 to get our total monthly payment of $800 and then the total time in the deal remember was four months so 800 times four equals a total of 3,200 dollars in interest payments so step four is to calculate the inspection fees by adding up all of this affection fees of eight and $175 each which comes to $1,400 next is step five which

Is to calculate the extension fees since the loan was for six months and in this example we did the deal in four months there are no extension fees okay finally step six is let’s add up all of these fees so if we add everything up we have points of 1,600 we have miscellaneous fees of 1500 we have interest of $3,200 we have inspection fees of $1400 we don’t have

Any extension fees so our grand total carrying cost is $7,700 now you may be thinking jerry that’s expensive money and yes it is but let’s put it in perspective how much did we make on the deal now assuming we sold the deal for one hundred and forty three thousand which was our arv less our purchase of 75 thousand less rehab of twenty five thousand less carrying

Costs of seven thousand seven hundred less let’s say closing fees of eleven thousand five hundred that covers commissions and everything else we get a net profit of twenty-three thousand eight hundred dollars so let me ask you would you be willing to pay seven thousand seven hundred dollars in cost of capital to flip a house in four months and make a net profit

Of twenty-three thousand eight hundred dollars leave a comment and let me know if you would do that now the best way to get funding for your deals is with flipster so flipster is the number one house flipping deal management platform on the planet it foods everything you need to organize streamline and automate all the stuffs of flipping houses and included with

Flipster is funding sources and funding solutions to getting not just hard money but also private money so you can literally do deals with a hundred percent funding now to learn more and see the nation’ just go to get flipster com or click the link in the description now i hope you learn something on today’s video if you did hit that like button and leave a comment

Let me know your biggest takeaway i’d love to hear from you and seriously if you’re in a flipping real estate subscribe to my channel as of this recording i’ve done over 350 videos all on how to make money flipping real estate i’ve organized all of them by topics and playlists and you can learn so much right here on this channel to help you make more money and less

Time so you can live your dream life do that now and i’ll see you on the next video

Transcribed from video

How Much Does It Cost To Borrow Hard Money? By Flipping Mastery TV