4 Reasons You Should Not Get A Hard Money Loan

Hard money loans are high-interest loans that are underwritten on the asset itself instead of on your own personal credit strength. They let you do real estate deals that you otherwise wouldn’t be able to. They’re a great tool for people who know what they’re doing. But like any tool, if they’re used incorrectly, then you could get really hurt. And before being a lender, I want to be a friend who’s here to help you out.

Read on for some reasons why you should NOT get a hard money loan. You can also watch my video talking about this topic.

Not enough down payment

Large hard money lenders will usually require a 10-20% down payment to ensure you have skin in the game. They want to make sure that you don’t just take on a bunch of projects and then leave when things get tough. They also want to protect their downside in case they have to foreclose on you.

Don’t expect to get a loan unless you have the funds to do the deal. If you really think you have a great deal on your hands, try to find a partner who will be willing to fund the down payment and closing costs. You can split the profits with them 50/50. It’s harder to network these days due to COVID, but you can still find virtual networking groups on meetup.com or on Bigger pockets to find partners who might be interested. If you want, you can even join my group where we have around 1500 members and meetup at least once a month at meetup.com/everythingrei

Not enough reserves

Hard money loans are short-term, interest-only loans with high-interest rates. This means that all the mortgage payments that you make will be going solely towards the interest part of your loan and your principal balance never decreases. In the worst case, your loan may come due and you’ll have to pay an additional point to extend it. By not having a sizable fund to make the monthly payment, you’ll run the risk of running out of money before you complete your project. Trust me, this isn’t a position that you want to be in.

High-interest rates

Like I mentioned, you need a sizable amount of reserves to make the interest payments. Hard money loans are given based on the hard asset itself instead of on the borrower’s credit, this makes it a riskier loan for the lender and that’s why they charge higher interest rates. If you’re not careful, interest quickly racks up, and your deal may not be profitable anymore. So if your deal is tight, then it’s probably best if you don’t use a hard money loan to do the project.

Not having multiple exit strategies

Because of the high-interest rates, you need to get out of your hard money loan as soon as you can. Flippers do this by quickly getting the permits and rehabbing their projects and putting them on the market with as much advertising and exposure as possible. They look for fast ways to buy, rehab, and sell their projects before moving on to another.

But what happens if things don’t go as planned? What if your permits don’t come through and you aren’t able to do the project as you expected? Or what happens if your project just sits on the market and doesn’t sell for what you hoped for? You can watch my video of my nightmare story when that happened to me.

You need to have multiple exit strategies in mind if things don’t work according to plan. Some people buy houses with the intent to flip them, but keep them as rentals if they can’t get the price for it. Some people buy properties with a hard money loan but have the ability to refinance into a lower interest rate loan.

Conclusion

Getting a hard money loan can be a great tool to buy and profit from real estate investing. But that’s just it, a tool. Just like in construction work, if you use the tool incorrectly or you don’t know what you’re doing, you’re going to end up getting hurt.

Before you get into a hard money loan, make sure you know what you’re getting yourself into by watching this video where I talk all about how hard money loans work. And if you’ve finished watching this video and still think that a hard money loan is right for you, you can schedule a call with me to help you with your hard money lending needs.

• Schedule a call