As an investor in the Harvey Capital Income Fund, you earn a fixed rate of 8.5-10% annually, paid monthly. That rate doesn’t change based on how the underlying loans perform — it’s your contractual return. So why should you care about capital velocity? Because it directly affects how wide the margin of safety is between what the fund earns and what it owes you. The wider that margin, the more durable your monthly income becomes.
Capital velocity refers to how quickly capital is deployed into a loan, returned when the borrower pays off, and redeployed into the next loan. The faster the fund turns its capital, the more origination fees it collects per dollar per year — and those fees are what build the cushion that ensures your interest payments continue uninterrupted regardless of market conditions.
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:
- 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 strong gross return for the fund. But what happens when the capital comes 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
The fund’s gross annualized return jumps from 16.7% to 22.6% — not because the loan terms changed, but because the capital turned over faster. And once that $130,000 is returned, it’s immediately redeployed into a new loan, collecting another round of origination fees. If the fund turns the same pool of capital three times in a year, the gross economics become very strong. For you as an investor earning a fixed 8.5-10%, this means the fund has a substantial cushion above your rate — room to absorb slow quarters, unexpected expenses, or idle cash without ever missing your monthly distribution.
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 capital velocity, which widens the spread between what the fund earns and what it pays investors. That spread is your margin of safety. With over 30 loans originated totaling more than $4 million, and zero principal losses to date, this focus on borrower quality has proven to be the right approach.
As an investor earning a fixed return, you want to know that the underlying economics of the fund have room to breathe. Capital velocity is what creates that room. It’s not about chasing higher yields for investors — your rate is set. It’s about ensuring the fund generates enough gross income that your monthly interest payment is one of the most reliable line items on the books. That’s what a well-run lending operation looks like from the inside.
Targeted returns are not guaranteed. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results.