How Are Some Hard Money Lenders So Darn Cheap?

Scroll through enough real estate Facebook posts and you’ll find some lenders offering private and hard money loans at 3 – 6%. This leaves many investors wondering: “How are some hard money lenders so darn cheap”?

I’ve been a private/hard money lender since 2019. But it took me years to be able to figure out how they are coming up with those rates.

How Hard Money Lenders Are Marketing Low Rates

You will frequently see lenders out there saying “I can get you a loan for a 5% rate. 30-year loan.” At the same time, you might be thinking to yourself, “I can’t even get that with a 30-Year fixed-rate loan. Even on my primary residence. Even with my 800 credit score.”

These lenders are marketing rates that are true but it’s likely being misconceived by the new investor.

So here is what they are actually trying to say.

Let’s Break Down The Math

Let’s pretend a lender markets an interest rate at 5% like the screenshot above.

Most new investors will think that the 5% number is annual percentage rate (APR).

In reality, this is the minimum interest rate you will pay. Meaning, this is the lowest amount of interest you will pay even if the loan is only outstanding for one day.

Instead of saying “Minimum Interest Paid is 5%”, it is marketed as “Rate as Low as 5%”.

If you don’t know how hard money loans work, I cover it in this article, but for the sake of this post, here is a quick breakdown.

The Costs of a Hard Money Loan

Hard Money and Private Lenders typically charge an origination fee of 1 – 4 points and an interest rate of 10 – 14% annual percentage rate (APR) in current market conditions (February 2023).

In addition, most lenders will require the loan to be outstanding for a minimum of 3 months.

Although, we do anticipate some changes, which we cover in The Future of Hard Money.

So let’s do the math on the very minimum amount of interest you will pay on a hard money loan.

Let’s say you get a loan for $100,000 and the lender charges 2 points to originate the loan and 1% per month in interest (12% APR).

At closing, they will get 2 points ($2,000) at closing and if you sell the property the next day, they will get 3 months of interest which is also $3,000 (3% of $100,000) since they are guaranteed to get three months of interest.

$2,000 in Origination Fees plus $3,000 Interest equals $5,000.

$5,000 divided by a $100,000 loan amount equals the 5% rate that they are marketing.

So there you have it. That’s how lenders are marketing such low rates.

What to Take With You

This isn’t a post about pointing the finger at other lenders who employ this marketing strategy.

To be honest, this is a common form of marketing you will see and it is technically true so long as investors only use the loan for the minimum amount of time.

I wrote this post to help new investors avoid the pitfalls of thinking some money is cheaper than it really is.

Hard money rates of 10 – 14% aren’t cheap, but searching for cheap capital in places where it doesn’t exist will cost you more in the long run.

And the final point I want to make here is that positioning your pitch is a vital part of the sales process for everyone. Understanding how lenders operate will save you a lot of headaches when searching for those who practice 100% transparency.

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Grant Smith

Grant has written over $5 million in residential notes since 2019 and manages 80,000+ square feet of self-storage. He is an alumnus of the University of Cincinnati (2018). Graduate of the Lindner College of Business Analytical Finance Academy Program.

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