Hard money loans are short-term loans, usually one to two years, given out by private lenders to investors. Due to the high risk, the rates are higher compared to ordinary loans, and you are required to make a down payment or have collateral before the loan is approved.
These requirements discourage many borrowers from taking hard money loans opting for long-term loans from other sources with lesser requirements. However, hard money loans can help you achieve your goal and repay the loan in time if well utilized. Below we look at four things to avoid when using hard money loans for your project.
Avoid Diverting GHard Money Loans to Other Projects
When borrowing hard money loans from Asset Based Lending, the collateral is the asset you are taking the loan for. This is meant to reduce the lender’s risk. The moment the money lands in your hands, you may be tempted to use it for other projects or to pay short-term debts that you may have. The best option is to stick to the project until completion. With a feasibility study, you most likely borrowed an amount that can fully fund the project. Sticking to it ensures project completion, and in return, you can use the project returns to clear the remaining loan balance
Not Investing in a Viable Project
Some projects can easily turn into white elephants if utmost care and in-depth research are not done before the project begins. One of the viable investments is residential houses in a well-developed area. On the other hand, commercial property investment may have a slow uptake, which may delay returns that may have been used to repay part of the loan. This is one of the key reasons why hard money lenders require a large down payment for a commercial property since it’s difficult to sell them in case of default compared to selling residential property. If possible, invest in a project that promises quick returns or one that does not require a large down payment. This eats into the savings you would have used to begin the project or complete if you run out of funds.
Not Comparing Different Loans
Unlike in the past where private real estate lenders were the primary lenders of hard money loans, currently, it’s very easy to access the loans as a result of the JOBS Act of 2012. You can access these loans online through real estate crowdfunding, peer-to-peer lenders, and marketplace lenders, among others. Though they do not refer to themselves as hard money lenders, that’s exactly what they do. With the many options, you may be tempted to go for the first institution that agrees to lend you the loan. It’s important to compare several loans and settle on the fairest in terms of interest rates and other requirements.
Not Doing Due Diligence and Seeking Referrals
You need to do due diligence on the lender, the loan, and the property investment. If not wisely considered, the loans can lead to heavy financial burdens due to high-interest rates and short repayment periods. The lender’s loan history and the loan terms are very key. Pay attention to the loan fees, terms, interest, and rates. Find out the lender’s track record and if they have succeeded in funding a project similar to yours. Online lenders that require a down payment also present a risk of being scammed. Ensure you are borrowing from a legitimate lender. Find referrals, testimonials, and reviews from those who have borrowed from such before.
Hard money loans are convenient for investors who need quick finding for an investment. If you can cut the repayment period, this could result in a profitable venture in the long run. You only need to be careful by doing due diligence, comparing different loans, investing in a viable project, and not diverting the money to other projects.
