Hard Money Loans 101 – Leveraging Deals
How can you use leverage to increase your return on investment for flipping a residential property?
Many buyers/investors choose to use private loans when they are cash restricted or looking to increase their returns on investment for raising funds. This can be very effective to achieve the desired result as demonstrated below.
Unleveraged Example:
A buyer finds a home for purchase $200,000, and it needs $45,000 of repair work along with other holding costs. The value of the home after repairs would be $295,000. In this scenario, using cash for the purchase, repair, and holding costs, the approximate return on investment would 12%. See the calculation below:
Sales Price – $295,000
Cost of Sale – $20,650
Cash for purchase – $200,000
Repair Cost/Other holding costs – $45,000
Net profit of $29,350 on a cash investment $245,000 = 12% ROI
Leveraged Example with same scenario:
In the second scenario, the purchase price, budget, and sales price remain the same. However, instead of using cash, the buyer decides to take out a hard money loan from Lantzman Lending. Lantzman Lending is willing to lend $160,000 to the buyer at an interest rate of 12% with 3% origination fees up front. In this scenario, the buyer’s return would look something like this:
Sales Price – $295,000
Cost of Sale – $20,650
Cash for purchase – $200,000
Repair Cost/Other holding costs – $45,000
**Loan Cost for 4 months including origination fees- $11,200
Net profit of $18,150 on a cash investment $96,200 = 19% ROI
**When using leverage to increase your returns, you must be very aware of the realistic time frame to renovate, market and sell your property. Extra time in any of these stages will reduce your return. However, for the cash restricted investor or those looking to increase their return on investment, this is a very valuable tool.
Please email me at eoconnor@lantzmanlending.com to talk about the scenario for your loan. These terms are not exact, and they vary depending on the perceived risk of the loan. Leverage may be higher or lower, with construction hold back funds available to further increase your return. Read my article on construction hold back here.
Best of Luck on your next investment,
Erin James O’Connor
Lantzman Lending
(619)847-3115
eoconnor@lantzmanlending.com
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