Should you get hard money loans for your real estate investing? In this blog post we’ll answer that question for you by sharing 3 potential disadvantages of using a hard money lender in Indiana, Arkansas, California, Alabama, Florida to help you decide whether hard money loans are right for you.
Real estate investors prefer not to tie up their own capital in a real estate deal but instead they’ll use other money sources to help them do deals. There are many money sources, and hard money lenders are one such source.
There are good hard money lenders out there and hard money loans are a common way to invest. However, every investor needs to decide for themselves if a hard money loan is right for them. To provide you with a balanced view, consider these 3 potential disadvantages of using a hard money lender in Indiana, Arkansas, California, Alabama, Florida.
3 Potential Disadvantages Of Using A Hard Money Lender in Indiana, Arkansas, California, Alabama, Florida
Disadvantage #1. High Interest Rates: Pay Back With Interest
Hard Money lenders often charge much higher interest rates than traditional lenders, such as banks or credit unions. This can make borrowing from a hard money lender a more expensive option for borrowers, especially if the loan will be held for a long period of time. There’s nothing wrong with them charging interest for the loan but you need to be aware that the interest exists and you need to factor it into your accounting. Are you prepared to make principal plus interest payments?
Disadvantage #2. Need More Money
Another disadvantage of hard money loans is that it’s not a bottomless pit of money. You need to figure out ahead of time how much money you need and then you need to borrow that amount of money. Problem is, what if you counted wrong and need more? Either you go back and apply for more or you look somewhere for the extra money.
Disadvantage #3. Return On Investment
When you borrow money and have to pay it back with interest, this could potentially delay or reduce your return on investment. For example, if you borrow money to fix up a rental property and then rent it out at $500 a month, any hard money loan repayment of $500 a month will prevent you from seeing any return until the loan is paid off. (These are just example numbers and of course you should structure every loan in a way that makes sense for you.)
Hard money loans are one of many investment tools. They have many advantages to help real estate investors run and grow their business by doing more deals. Some of the advantages that we will outline in our next blog post are as follows; Quick funding, less stringent credit requirements, flexibility, and asset-based lending. And just so you know – we actually like hard money loans and believe in them. However, it’s important for every investors to know all the facts up-front, and this information about 3 potential disadvantages of using a hard money lender in Indiana, Arkansas, California, Alabama, Florida will help you figure out if they’re right for you.