We are excited to announce that we’ve finally launched a new version of our hard money calculator.
We wanted to create a new version because we felt that all existing hard money calculators (including our old version) fall short of what our borrowers really need. They are clunky, difficult to use, and the results might be challenging to interpret. In addition, all of them look the same – as if they were copied from the same place.
We wanted our hard money calculator to be different. Our first requirement was an intuitive interface. Many newer borrowers do not consider all costs associated with buying, rehabbing, and selling an investment property. Our goal was to educate them that calculating your profits is more complex than subtracting the purchase price and the renovation costs from the after-repair value of the property. Even borrowers with experience and sophistication often neglect to account for some expenses – overestimating their projected profit as a result.
We also wanted to provide our borrowers with a better understanding of how to measure their deal’s profitability. The key measurements are the return on investment (ROI) and the annualized return on cash.
The annualized return on cash is another measure you should consider. It’s a bit more complex than ROI. It measures the annual return you are making on your personal cash contribution to the transaction. Let’s assume you’ve invested $30,000 of your own money into a transaction. You flipped the property after 12 months and walked away from a closing table with $40,000 in your pocket. Out of these $40K, $30,000 covers your initial contribution, and $10,000 is the profit you’ve made. 10K is roughly one-third of the $30K you’ve invested, which means you’ve annualized return on cash is 33%. If you reduce the holding period from 12 months to 6 months, the annualized return on cash goes up to 78%.
The annualized return on cash comes handy when you compare your flip with other available investment opportunities. For example, let’s assume that instead of investing your $30K into a fix-and-flip transaction described above, you’ve decided to invest it into the market. Let’s assume it produces a 10% annual return (comparable with the SP500 annual average return since inception). That makes your $30K investment go up to $33K in 12 months. Obviously, flipping real estate and passively investing in the stock market are drastically different investment strategies. They vary both in terms of the risk you are taking and the involvement they require. However, the annualized return on cash offers an important way to compare them.
Investopedia defines return on investment as the profit earned on an investment divided by that investment cost. Bear in mind that there is no prescribed ROI for a project to be considered a success or failure. However, as common sense suggests, if your ROI is 2%, it might not be the best transaction to engage in. On the other hand, setting unrealistic ROI goals might significantly limit your investment potential. Some new-ish borrowers often make comments that they would be looking for deals only with a certain minimum ROI. The truth of the matter is that DC real estate is a competitive market. You have to be nimble and flexible. ROI of 8% might not sound impressive, but if it’s a relatively easy project that you might turn around in three months, it might be worth your while.
Here is another unique feature of our hard money calculator. To make it easier to evaluate your deals, we’ve introduced visual elements to our calculator. You can now visualize your costs and profits in relation to your after-repair value. You can also see the breakdown of your sale proceeds to better understand how much profit your cash contribution might generate you once you rehab and sell your property.
Another goal behind our new calculator is to provide our borrowers with increased transparency into how we underwrite our loans. This is why it comes with underwriting comments that offer an insight into how a private money lender like us might think about your transaction. It’s the second-best thing after talking to us live.