Why Hard Money is Better Than Taking on A Partner To Make A Profit
Aren’t the interest rates on hard money loans just ridiculously high? Why would anyone borrow hard money funds rather than take on a partner?
Let’s compare the cost of a hard money loan with taking on a partner. Then you decide what’s a cheaper option.
The first question to ask yourself is, how much of your final profit will a partner take? 35%? 50%? 60%? Let’s say you find a partner that will take 50% of your final profit. You’re better off using a hard money loan rather than use that partner. Here’s why:
- Hard Money Loan for $100,000: Hard money loan interest rate = 12% annually. On a $100,000 loan you pay loan fees of 3% or $3,000 when the loan closes. Then you pay 1% per month ($1,000 per month) until the house sells. Let’s say it takes you 4 months to fix up and resell a house. The total cost of the money for that 4-month time period is $7,000. ($3,000 in loan fees + $4,000 in interest payments). Let’s say your profit is $23,000 on this flip. After the cost of the hard money loan, you’re left with $16,000 in profit.
- A Partner loans you $100,000 and takes 50% of your final profit: Let’s say your profit is $23,000 on this flip. After you give your partner 50% of that profit, you’re left with $11,500 in profit.
- This is a difference of $4,500 over a 4-month time frame. Over 6 months it’s a difference of $2,500.
The double digit interest rates charged by hard money lenders may seem high on the surface. But when you compare it with the cost of taking on a partner, it suddenly becomes a better option, doesn’t it?
Get to know all of the hard money lenders that lend in your area on a first name basis, so when the right deals do come along, you can take them down and make a profit! Want to know how you can get started using hard money on your next deal? Reach out to us today and let’s get started!