Dutch Interest: A Primer for Borrowers
What is Dutch Interest?
Typical for a fix and flip loan is to pay Dutch Interest. In this lending arrangement, interest is paid on the entire loan amount from Day 1, even though you receive the rehab portion of the funds in stages through the course of the renovation. Why would a real estate investor agree to pay interest on money they don’t have yet? Let’s find out.
Why Go Dutch?
It’s worth understanding, first, why hard money lenders like Dutch Interest. It’s not to squeeze a few extra dollars; it’s because there’s no risk of someone coming in and taking their first lien position (aka, a claim on the property).
Without that risk, Dutch draws require no extra due diligence for the lender to release the funds. A non-Dutch draw, meantime, adds the time and energy of a title search to make sure someone hasn’t come in on first lien, or to get a lien waiver. These extra work hours add up, and they add to the cost of a non Dutch draw for the borrower.
Also worth knowing is what the lender does with the draw funds. With Dutch interest, the lender transfers the draw funds into an escrow account. Since the money is in escrow, you can feel sure it’s available when you need it. Non-Dutch funds are not in escrow, and potentially may not be there later.
Meaning: A Dutch Interest product can be offered at a lower rate, with more assurance, and quicker draw time.
The Balance
In some cases, there can be a bit of a balancing act to see which option comes out cheapest. If you have a small or medium sized project and expect a 6 month turnaround, there are usually no or minimal savings to be had with non-Dutch interest. The only thing you get for sure is payment delays. For large, longer term projects with significant rehab budget, you may find savings in a non Dutch draw—if you can tolerate the extra fees, the payment delays, and the paperwork. But then there’s the bigger risk: if another lien is generated, or if the lender is out of funds, you might find yourself not getting the money at all.
Key Benefits of Dutch Interest
Overall, Dutch Interest is a strategic benefit for real estate investors in the following situations:
• Short-term and medium-term, small and mid-sized projects
• Projects where fast cash flow is essential
• Projects with uncertainty around funds/timing.
Backflip and Dutch
Hard money lenders like Backflip offer Dutch Interest as standard, as it keeps things efficient, which works for most fix-and-flip real estate investors. Non-Dutch interest is available, with costs attached. Of course, it’s essential to carefully weigh the pros and cons and assess which financial structure aligns with your specific investment goals and timeline. By understanding the nuances of Dutch Interest, you can make more informed decisions in the real estate market.
Good luck!
