When investors hear that hard money lenders charge 12-18% interest rates plus origination points, the natural question is: how much of that actually makes it to investors? It's a fair question. The key is understanding exactly how the lending economics work — and how the Harvey Capital Income Fund translates those gross lending returns into targeted 8.5-10% annual returns for our investors.
At Harvey Capital, we believe in transparency. We're not here to sell you on hype; we're here to show you the math. The fund's gross lending returns are strong, and that's what allows us to target attractive, consistent investor returns. Let's break down how.
It's More Than Just the Interest Rate
The first component of return is the most obvious: the interest rate charged to the borrower. Our borrowers are professional house flippers and rental property investors — experienced operators who use short-term financing to acquire, renovate, and either sell or refinance residential properties. In our market, interest rates typically fall between 12% and 18%. This is our baseline return, but it's only the beginning of the story.
On top of the interest, we charge origination points. These are upfront fees, calculated as a percentage of the loan amount, paid by the borrower when the loan is initiated. A typical fee is 2-4 points. For a $200,000 loan, 3 points would be a $6,000 fee paid on day one. This immediately boosts the return profile of the loan before a single interest payment has been made.
When you combine the interest rate with these upfront points and other small fees (like a $700 document fee), the annualized return starts to climb significantly higher than the stated interest rate. But there's one more crucial factor that really accelerates performance: velocity.
The Power of Capital Velocity
Capital velocity is one of the most important, yet least understood, drivers of return in short-term lending. It refers to how quickly we can lend out capital, get it back, and lend it out again.
Our loans are typically written with a 9-month term. However, our borrowers are professional house flippers. Their goal is to buy a property, renovate it, and sell it as quickly as possible. The faster they sell, the faster they pay back our loan, and the more profit they make. This aligns our interests perfectly. When they pay a loan back early, we get our capital back, plus all the interest owed for that period, and we get to keep the full origination fee we collected upfront.
Let's run the numbers on a real-world example. Imagine we make a $130,000 loan with a 12% interest rate, 3 origination points, and a $700 doc fee. The term is 9 months. The upfront fees collected on Day 1 would be $4,600 (3 points, or $3,900, plus the $700 doc fee).
Scenario 1: Borrower pays off in 4 months.
In this case, we would earn $5,200 in interest ($130,000 * 12% * 4/12). Add the $4,600 in upfront fees, and the total profit is $9,800. This represents a 7.54% return on capital in just four months, which annualizes to a powerful 24.4% return.
Scenario 2: Borrower takes the full 9 months.
If the loan goes to term, the interest earned is $11,700 ($130,000 * 12% * 9/12). The total profit becomes $16,300 ($4,600 in fees + $11,700 in interest). The return on capital is 12.54%, which annualizes to a still-strong 16.9% return.
As you can see, the faster our capital turns over, the more frequently we collect those high-impact origination fees, which dramatically increases the annualized return for our investors. This is the engine of hard money lending returns.
Why the Spread Matters for Investors
You might look at the gross lending returns above and wonder why investors receive 8.5-10% when the underlying loans generate significantly more. This is by design — and it's what makes your income reliable. The spread between what our borrowers pay and what our investors earn is not excess profit sitting in someone's pocket. It's a cushion that absorbs the operational realities of lending — a loan that pays off slowly, a month where deployment dips, unexpected legal costs on a workout, or simply the cost of running the operation.
A fund with a razor-thin spread is fragile. One slow quarter and investor payments are at risk. A wide spread means we can pay our investors their targeted monthly interest in virtually any market environment, because the underlying economics have enough room to absorb friction. That's the whole point — your income shouldn't depend on everything going perfectly.
Our Conservative Approach
These returns are generated with a conservative, low-leverage approach. We are not borrowing heavily to juice returns, which adds a significant layer of risk. We primarily lend our investors' capital, and I invest my own personal capital right alongside them. Our weighted-average after-repair loan-to-value (ARLTV) is a modest 66.52%, meaning we maintain a substantial equity cushion in every property we lend against.
Of course, no investment is without risk. Returns can be impacted by loans that take longer to pay off, reducing capital velocity. And while we have had zero principal losses to date, a default is always a possibility. That's why our underwriting is so rigorous and why we focus on experienced borrowers. A period of lower deal flow could also mean more cash sitting on the sidelines, which would drag down overall returns.
We believe the best investors are informed investors. Understanding the mechanics of how returns are generated—from interest and fees to the velocity of capital—is the first step. The numbers are not magic; they are the result of a disciplined process, aligned interests, and a focus on a specific niche in the private credit market.