If you invest in real estate you have been told time and time again that the key to success and longevity as an investor is OPM, other people’s money. Whether you are borrowing the entire investment amount or just leveraging your own money you need to know the true cost of money. Some costs are obvious and known up front such as the points, interest, late fees, penalties, etc. but there are other costs that borrowers need to take into consideration.

When borrowing money to invest in real estate most investors first turn to hard money. If you are familiar with hard money you know it is expensive. Most hard money lenders charge 4+points or more and about 11%+ interest.  If you do the math this is an expensive way to go but it is a great place to start until you find better terms once you have experience. You should also keep in mind that most hard money lender’s terms are usually 6-12 months which should be much more than you will need if you have a plan and execute it, at the same time it does add some pressure. With these lenders you know what you are getting for the most part but what about the cost that you are told about but may not have considered, especially if it is your first time using this type of loan. When using hard money you are REQUIRED to purchase one or more of the following: survey, inspection, subject-to appraisal and/or termite inspection. These are great to have but the cost for each of these can get expensive if you did not plan for them. Many hard money loans if not all of them are also now requiring borrowers to pay/escrow at least 3-6 months of property taxes. Others have begun to charge loan servicing fees as well. Another cost to consider is the cost of each inspection done every time a draw is made from the repair escrow. I have seen an inspection repair draw cost anywhere from $150- $400 per inspection.  These inspection costs are done only when you request a draw from your repair escrow so it is in your interest not to request too many draws. Wait, there is more. Many people do not like to think about this but what if the term of your loan ends but you are still holding the property? Is there a fee to extend the loan? In most cases the answer is yes. Once you begin to add these costs and multiply them by the number of deals you want to do per year you will see the amount of potential profit that is spent on a few necessities and the rest wasted on garbage fees. Read More→