Using hard money to finance a real estate flip exponentially increases ROI

Using hard money to finance a real estate flip can result in a higher ROI than using cash because it allows investors to leverage their investment and potentially increase their returns. Hard money loans typically have shorter terms and higher interest rates than traditional bank loans, which means that investors can access funds quickly and without the same credit and income requirements as traditional bank loans.

Here's an example to illustrate the potential benefits of using hard money versus cash to flip a house:

Scenario 1: Using Cash

An investor purchases a property for $100,000 in cash and spends $50,000 on renovations, bringing the total cost of the investment to $150,000. After six months, the investor sells the property for $200,000, making a profit of $50,000. The investor's ROI would be 33.3% ($50,000 profit ÷ $150,000 investment).

Scenario 2: Using Hard Money

An investor purchases a property for $100,000 using hard money with a 12% interest rate and a six-month term. The down payment would be 10% of purchase price or $10,000. The hard money loan would be $90,000 for the purchase and $50,000 for the repairs or $140,000. The total interest on the loan would be $8,400 ($140,000 x 0.12 x 0.5), the total points and fees would be $3,000 bringing the total cost of the investment to $21,400 ($10,000+$8,400+$3,000). After six months, the investor sells the property for $200,000, making a profit of $38,600 ($200,000 - $161,400). The investor's ROI would be 180% ($38,600 profit ÷ $21,400 investment).

In this example, using hard money resulted in a significantly higher ROI than using cash. By leveraging the investment with a hard money loan, the investor was able to access funds quickly and potentially increase their returns.

Some reasons why hard money can be a better option than using your own cash include:

Faster access to funds: Hard money loans can be approved and funded quickly, allowing investors to act quickly in a competitive market.

More flexible lending requirements: Hard money lenders are typically more concerned with the value of the property being used as collateral than the borrower's credit or income, making it easier for investors to secure financing.

Ability to leverage investments: By using hard money to finance a real estate flip, investors can potentially increase their returns by leveraging their investment with borrowed funds.