When you think about earning returns from lending, what’s the first number you look at? For most people, it’s the interest rate. An 18% loan seems like a slam dunk compared to a 12% loan. It’s intuitive, but in the world of short-term private lending, it’s also wrong. The most important driver of your actual, annualized return isn’t the interest rate; it’s the speed at which your capital is put to work, paid back, and put to work again. It’s a concept called capital velocity.
It might sound counterintuitive, but a 12% loan that pays off in four months can put more money in your pocket than an 18% loan that’s held for a full year. At Harvey Capital, this isn’t just a theory; it’s the core of our income strategy and the reason our Harvey Capital Funding I LP fund delivered an 18.36% annualized return to our investors in its first year.
The Engine of Returns: Fees, Not Just Interest
The secret lies in the fee structure of hard money loans. Unlike a traditional mortgage, where the bank makes its money over 30 years of interest payments, a significant portion of the profit in short-term lending comes from upfront fees. These are typically charged as "origination points," where one point equals one percent of the loan amount.
At Harvey Capital, a typical loan to an experienced house flipper includes a 12% interest rate, 3% in origination points, and a $700 document fee. The key is this: we collect those points and fees every single time we issue a loan. The interest income is great, but the fees are what turbocharge the returns. The faster a loan is repaid, the faster we can redeploy that same capital into a new loan and collect another round of fees. This is capital velocity in action.
Let's Do the Math: A Real-World Example
Abstract concepts are fine, but let’s look at a concrete example with real numbers from our portfolio. Imagine we lend $130,000 to a house flipper to acquire and renovate a property.
Our terms are:
- Loan Amount: $130,000
- Interest Rate: 12% per annum
- Origination: 3 points ($3,900)
- Doc Fee: $700
Now, let’s compare two scenarios.
Scenario 1: Loan Held to 9-Month Maturity
In this case, the borrower uses the full term of the loan before selling the property and repaying us. Here’s the profit calculation for the fund:
- Interest Income: $130,000 * 12% * (9/12) = $11,700
- Origination Fee: $3,900
- Document Fee: $700
- Total Profit: $11,700 + $3,900 + $700 = $16,300
To find the annualized return, we divide the total profit by the loan amount and adjust for the 9-month term:
($16,300 / $130,000) / 9 months * 12 months = 16.72% Annualized Return
That’s a solid return by any measure. But what if we could get our capital back faster?
Scenario 2: Loan Paid Off in 4 Months
This is our ideal scenario. We work with experienced flippers who can get in, renovate, and sell a property quickly. If the same loan is paid off in just four months, the numbers change dramatically.
- Interest Income: $130,000 * 12% * (4/12) = $5,200
- Origination Fee: $3,900
- Document Fee: $700
- Total Profit: $5,200 + $3,900 + $700 = $9,800
At first glance, $9,800 in profit looks much smaller than $16,300. But the capital was only tied up for four months. Let’s look at the annualized return:
($9,800 / $130,000) / 4 months * 12 months = 22.62% Annualized Return
That’s a massive difference. By turning the capital over more quickly, the effective annualized return is significantly higher. And the story doesn’t end there. Once that $130,000 is returned, we immediately redeploy it into a new loan, starting the clock on a new stream of interest and, more importantly, a new set of upfront fees. If we can do this three times in a year with the same pool of capital, the returns compound powerfully.
Advanced Strategy: The Secondary Market Multiplier
We don’t just wait for borrowers to repay us. To further increase capital velocity, we actively sell participation interests in our existing loans to other investors on the secondary market. This allows us to recycle our fund’s capital even faster.
For example, after originating that $130,000 loan, we might sell a 75% participation to another investor. This brings $97,500 back into our fund immediately, which we can then use to originate a completely new loan, collecting another set of origination fees. We still retain a 25% stake in the original loan and earn our share of the interest, plus we keep the servicing rights. It’s like having your cake and eating it too—we get our capital back to redeploy while still earning income on the loan we just sold.
Why We Bet on the Jockey, Not Just the Horse
This entire strategy hinges on one critical factor: the quality of the borrower. This is why we are so selective and focus on experienced house flippers with a proven track record. A borrower who offers to pay an 18% interest rate but takes 18 months to complete a project is far less profitable for us than a seasoned pro who pays 12% but turns the project around in four months.
Our borrowers’ success is our success. Their ability to execute quickly and efficiently directly fuels our fund’s velocity and, therefore, our investors’ returns. We’re not just lending money on a property; we’re investing in a borrower’s business plan and their ability to execute it. With over 25 loans originated totaling more than $3 million, and zero principal losses to date, this focus on borrower quality has proven to be the right one.
It’s a different way of looking at the lending business. It’s not about squeezing every last percentage point of interest out of a deal. It’s about building a high-velocity engine of capital that generates fees and returns again and again. It’s about partnership, efficiency, and speed. That’s the real secret to outsized returns in private lending.