How to Know If a Hard Money Loan Will Provide Good ROI
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How to Determine If a Hard Money Loan Will Provide Good ROI

James Crandall

August 8, 2023 · 6 min read

Assessing the potential Return on Investment (ROI) of a hard money loan involves careful evaluation of various factors. There's a lot to think about, and like with any investment, there are no guarantees. However, by doing your due diligence, you can increase the likelihood of good ROI.

Below, we'll walk you through everything you need to know about hard money loans to know if they'll provide healthy ROI.

Is a Hard Money Loan Considered Cash?

A hard money loan is not considered cash in the traditional sense. While it provides you with funds to complete a real estate transaction, it's technically a form of financing rather than a direct cash payment.

Here's how a hard money loan differs from cash:

  1. Source of Funds: Cash refers to physical currency or funds in a bank account that you can use immediately for transactions. A hard money loan is borrowed money from a private lender or investor specifically for a real estate investment.
  2. Lender Involvement: A hard money loan involves a lender who provides the funds for your real estate purchase or project. You're obligated to repay the loan amount plus interest according to the loan terms.
  3. Loan Repayment: With a hard money loan, you have a legal obligation to repay the loan within the specified period, usually through the sale of the property or another exit strategy.
  4. Terms and Interest: Cash doesn't come with interest or loan terms. In a hard money loan, you'll have an agreed-upon interest rate and repayment schedule, which can impact the total cost of the loan.
  5. Investment Strategy: Cash can be used for various purposes, including real estate investments. A hard money loan, though, is specifically designed to provide short-term financing for real estate investors, particularly for fix-and-flip projects or property acquisitions.

TLDR: A hard money loan is a form of financing that provides you with funds to carry out a real estate investment. While it's not considered cash, it can offer you the liquidity needed to capitalize on investment opportunities when traditional financing options might not be available.

What Is ROI?

ROI stands for "Return on Investment." It's a metric used to measure the profitability of an investment. ROI calculates the percentage gain or loss generated on an investment relative to the initial amount of money invested.

The formula for calculating ROI is: ROI = (Net Profit / Initial Investment) * 100

Where:

  • Net Profit = Total earnings or gains from the investment (including any additional income generated) minus the total costs associated with the investment.
  • Initial Investment = The original amount of money invested.

The resulting ROI percentage indicates how much profit or loss has been generated for every dollar invested. A positive ROI indicates a profitable investment, while a negative ROI indicates a loss.

ROI is commonly used by investors to assess the performance of various real estate investments and make informed financial decisions. It helps compare the potential returns of different investments and provides a way to evaluate whether an investment is worthwhile based on the potential profits relative to the initial capital outlay.

Hard money loans can provide great ROI if three important factors are taken into consideration:

  • Speed
  • Flexibility
  • High Returns

The investor wants a return on his investment and you want the use of their money. It's important to note the timeline, what the percentage rate is, and what the penalties are if you don't meet the guidelines.

Ultimately this is meant to be a strong relationship where you both win.

How to Estimate the Value of a Hard Money Loan

Speed

Hard money loans are known for getting you your money fast. Traditional loans can take 2-3 months, whereas hard money loans can close in 2-3 weeks-- some hard money lenders can turn around in just a couple of days!! Furthermore, you may even be able to get a proof of funds letter. These allow you to write offers that aren't contingent on financing, making you the equivalent of someone that is buying on an all-cash basis. This can open up a new world of deals to you by allowing you to compete with deep-pocketed investors.

Flexibility

The best properties are frequently out of the box. They might need physical labor or could be located in areas where reliable comps are hard to find. As a property investor, you might also have a non-traditional profile. You might have high debt levels that come from multiple investment properties, credit issues stemming from past challenges, or other characteristics that might make it hard for you to go the traditional route for a loan. Hard money lenders have the flexibility to look past them and approve you for financing to purchase a property.

High Returns

The sweet spot for hard money loans is properties that offer the potential for high returns over a short period. Given that hard money lenders charge higher origination points and interest than traditional lenders, a stabilized cash-flowing asset at the market price may not have enough return to absorb the cost of a hard money loan.

However, assets with the potential for significant upside can often make hard money loans a viable option. These properties typically fall into the following categories:

  1. Fix-and-Flip Projects: Properties in need of renovation or improvement can yield substantial returns when transformed and resold quickly. Hard money loans can cover purchase and renovation costs, maximizing profit potential.
  2. Short-Term Investments: Situations where a property's value is expected to increase rapidly over a short period, such as during a market upswing or due to planned development in the area, can justify the higher costs of a hard money loan.
  3. Time-Sensitive Opportunities: Certain real estate deals require swift action to secure, like distressed sales or auctions. Hard money loans provide the speed needed to capitalize on these time-sensitive opportunities.
  4. Value-Add Investments: Properties with untapped potential can benefit from hard money financing to make improvements and increase value. These include underutilized commercial spaces or multifamily properties with high vacancy rates
  5. Bridge Financing: Investors looking to acquire new properties before selling existing ones may use hard money loans as bridge financing. This allows them to secure the new property quickly and avoid missing out on opportunities.

Secure a Hard Money Loan With Yieldi

Yieldi can provide you with the capital you need to get a great ROI. Check out some frequently asked questions to see if our hard money loans are right for you and your next investment!

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