Are You Calculating Accrued Interest in your Real Estate Investing?

Hard Money Rips Investors Off With Accrued Interest
calculating accrued interest

I keep seeing investors getting ripped off with interest charges that are completely incorrect.  Typically when an investor gets to the closing table for the sale of his rehabbed property, he is focused on closing.  He wants to make sure his buyer closes. Seldom does he take the time to check for calculating accrued interest his hard money lender is charging him.  In some cases he may not care because he couldn’t have done the deal without the lender’s money.

On the flip side, it’s important to better understand what the correct accrued interest should be.  You also need to know how it is derived.  Payments to lenders are usually made on the first or 15th of each month after the money is borrowed.  Because most real estate closings don’t take place on the first or 15th of the month, partial interest is due.  This interest is calculated from the date of the closing until the first payment is due.  This cost is added to the expenses on the closing statement of the buyer (investor).

Likewise when the investor sells his property it likely won’t close on the first or 15th of the month.  In this case the investor will pay accrued interest from the last payment he made, again on a per Diem rate.  Some hard money lenders do not require monthly interest payments.  This is because the original purchase is due and payable at closing.

When a hard money lender calculates accrued interest the prominent issue becomes “How many days are in the month?”  Because the number of days varies between months, some lenders incorrectly assume each month has 30 days.  This could be favorable to the lender or not.  When you do the calculation yourself you’ll see it’s very simple using the calculator here.  But if you start calculating the number of specific days in each month over 6 to 10 months for example, it can get confusing especially when Leap Years roll around.

How much can one day’s accrued interest be?

 

Daily Accrued Interest (per Diem) for 365 Day Year
10%12%14%16%
$50,000 $    13.70 $      16.44 $      19.18 $      21.92
$100,000 $    27.40 $      32.88 $      38.36 $      43.84
$250,000 $    68.49 $      82.19 $      95.89 $    109.59
$1,000,000 $  273.97 $    328.77 $    383.56 $    438.36

 

But what if your lender uses a 360 day year instead of the a 365 year?

 

Daily Accrued Interest (per Diem) for 360 Day Year
10%12%14%16%
$50,000 $    13.89 $      16.67 $      19.44 $      22.22
$100,000 $    27.78 $      33.33 $      38.89 $      44.44
$250,000 $    69.44 $      83.33 $      97.22 $    111.11
$1,000,000 $  277.78 $    333.33 $    388.89 $    444.44

 

At first glance you may be thinking that the difference is a few dollars a day and not much to worry about.  However, the more important issue is “Are the number of days of accrued interest correct?”  This is where you’ll need to take each month and multiply it times the number of days in each month.  Make sure to include or exclude Leap Year to get the correct per Diem and what should be the correct number of days.  This can be a daunting task even for an experienced investor.

There is a simple solution.  It doesn’t cost anything to use.  You can calculate your loan’s accrued interest in seconds.  Then confront your hard money lender tactfully by saying, “Just checking because I noticed the number of days of accrued interest is incorrect, I borrowed it from ____ to ___ and that’s 176 days.  Your calculation shows 182 days which seems to be about $240 too much.”  Say nothing after that.  The first one to speak loses.  At this moment you’ll find out if your hard money lender is trustworthy or not by their response.   

Because of this common problem I programmed a simple but accurate Loan Payoff Calculator that can be used by anyone in seconds.  You can always find it here.  Check out your accrued interest ahead of time.  Do this even when you are contemplating getting a hard money loan so you can estimate your expenses and monthly cash flow.  Don’t get caught running out of money because of burdensome interest payments.  Always check that you are paying the correct amount of accrued interest whether it’s a hard money loan or a conventional lender (bank).  Plan ahead!

To your limitless success,

Dave Dinkel

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About Dave Dinkel 27 Articles
Dave Dinkel graduated from the University of Florida in 1968 with a BS in Chemical Engineering. He initially worked for a petrochemical research and development company in Illinois. Later he entered the financial arena as a stock and commodity broker with Merrill Lynch.While a stock broker he became a Certified Financial Planner and later started his own brokerage firms and stayed in the financial services industry for 22 years before retiring to pursue his love of real estate investing. After retirement, and because of his interest in business start-ups, he worked with a small company for a few years while driving their sales from under $12,000,000 to over $150,000,000 annually before going back to full-time real estate investing.Dave Dinkel has been a national platform speaker, contributor to local real estate clubs, mentor and consultant to numerous real estate investors and all the while running his own real estate business. Mr. Dinkel received the following degrees or designations: BSChE, FINOP, CFP, MSRP, RSP, RR, ROP, SROP, MGA, GA, Certified Estate Planner, Licensed Mortgage Broker, and Licensed Insurance Agent. He is often referred to as the “Teacher of Teachers” and his Mentoring continues to produce Students who go on to be national real estate "Gurus". .He has been a real estate investor since 1975 and recently received the first-ever Lifetime Achievement Award for Contribution to the Real Estate Investing Community. While being active in real estate investing for over 40 years, he and his wife Nancy have been married for over 52 years. He is most well known for the development of his Mentoring Program that has been called, "The Best Mentoring Program in the Country" which he continues today.In addition to his Mentoring Program, he started a full-service transactional funding Program so that new investors had the ability to do deals with no money of their own. He challenged the funding industry by making borrowing money very simple with his "One Point Funding Program" which has revolutionized the transactional funding industry and made millions of dollars available to investors who otherwise could not have afforded it. Currently his transactional funding is only available in Florida.Get more information about his real estate investing mentor program at http://www.DaveDinkel.com