True Cost of Money

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.

Now it is time to review the items that may not cost you money but can cost you time which may translate into a financial cost. The big one is how fast the lender can close. If the lender cannot close within the time of your contract you may lose the entire deal. If a lender costs you the deal by not funding in time but was given plenty of time to close I would not use that lender again. Other lenders have a reputation of fixing appraisals in order for them to come in lower so that the “70% LTV” they claim they will lend is actually only 60-65% LTV. This will make your out of pocket expense at closing much higher and potentially kill your deal. The other item to consider, which is similar to the first, is how fast the lender releases money from the repair escrow. A good lender should be able to cut you a check or send you a wire the same day or the next day immediately following the repair inspection. If the lender takes a long time to send you the money from the repair escrow it may hold up your renovation and cost you a few days. When in a loan each day comes with a price tag. On the same token, you need to interview other borrowers that have used the lender in the past to check on how they are about releasing funds from the repair escrow. Some lenders have a tendency to only pay out partial payment from a repair escrow when the entire payment for a particular repair should have been paid because it was completed. If you have $3,000 for granite on the draw schedule and the granite is completely installed the lender should release the full $3,000 not $2,700. I would demand full payment.

At the end of the day the lender will do what they want because they are in control of the funds but you have the power to choose the lender you work with. Lenders interview you and ask you for so many documents to lend you money, so why would you not interview them and find out all you can about them? The more you know about the lender the better. The more info you have the easier you can find a win-win situation.