Majority of flip properties are bought through a hard money loan. These loans have much higher interest rates than a traditional 30 year mortgage. A traditional loan today, you’ll pay ~3.5% while a hard money loan you’ll be paying anywhere from 8%-12% interest depending on your skill level.
Why are interest rates much higher on a hard money loan?
These are short term loans, usually 6 months to 2 years
Much larger risk on the asset
Thankfully, to offset the high interest rates, monthly payments are interest only. This means you won't be paying for any principal amount.
For example, say you buy a property for $500,000. You plan on putting 10% down, with a 12% interest rate.
The down payment will be $50,000 leaving you with a loan amount of $450,000.
At 12% interest you’ll be paying $54,000/year (450,000*12%). That means your monthly interest payments are going to be $4,500 ($54,000/12).
Most flippers, myself included, stop there knowing what our monthly payments are.
What you should do is go a step further figuring out how much interest you’re paying each day.
That $4,500/month payment towards interest is really $150/day ($4,500/30). This number will help you make much better decisions from start to finish.
Here’s an example: on my most recent flip, I was choosing between two different vanities. I went with the one that was $400 cheaper. The kicker was that it was going to take longer to get here. My plumber had to reschedule because all the vanities weren’t set. That set back cost me 4 days.
How much was the total interest for those four days? $600. What I thought saved me $400 actually cost me $200.
Here’s another example on the same flip: my electrician was planning on arriving early in the morning. I didn’t have all the floodlights or canned lights at the property for him to install. I could’ve done one of two options.
1. Have the electrician get the lights himself. I’d have to pay for journeyman labor which can be $100/hour and a markup on the material which is usually 10%.
2. Get the materials myself and have him come back the next day.
I chose the second option thinking he was going to come back the next day. He didn’t come back for 3 days. The hardware store was 15 minutes away and the material wasn’t expensive so the markup wouldn’t have been significant.
30 minutes of journeyman labor plus mark up on materials would have cost me an extra $100. Those three extra days of interest cost me $450. That’s an extra $350 taken away from the bottom line.
There were plenty more similar mistakes made but you get the point by now. I could also elaborate on dealing with contractors but that’s a whole other blog post.
You’re already dealing with slim margins while flipping. No need to make them smaller.
Let your business partners, subs, and anyone else incorporated in the job know what your daily interest costs are. If they finish earlier than expected, you can reward them with a bonus knowing exactly how much they’ve saved you.
The adage ‘time is money’ couldn’t be more true when it comes to interest payments. The total amount lost from the examples above cost me $600. Going the extra step of finding your daily interest cost can save hundreds, even thousands of dollars on your next flip.
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