5 Mistakes to Avoid With Your Hard Money LoanOn April 19, 2021 by Aston Fowler
Making it as a real estate investor requires that you have a good eye for real estate as well as the ability to see a property for what it has the potential to be. However, the most important attribute for any real estate investor to possess is expendable capital because, without it, even the best-laid plans are null and void.
Even though investors can get conventional loans, they often need funds more quickly than a traditional lender can get them the money they need. So, what do you do when you need money for an investment property ASAP and don’t have time to jump through hoops with lenders? You get a hard money loan. However, you have to be extremely cautious when you borrow money from a hard money lender. Continue reading to learn some mistakes you absolutely must avoid when you get a hard money loan.
1. Don’t use your primary residence as collateral.
One of the things that’s great about many private money lenders is that they don’t require a credit check to give you a loan. Instead, you use a piece of property as collateral to secure the loan amount, and your credit score never comes into play.
Private money loan eligibility and the loan amount are both determined by the value of the property used as collateral, and most borrowers use real estate as their collateral. However, you should never use your primary residence as hard money to secure a private money loan.
You should also do your due diligence before giving your business to a private lending firm. Northwest Private Lending is one of the most trusted firms for hard money loans in Oregon, and they have plenty of satisfied customers to prove it. When you use hard money to secure a loan, it’s critical to work with a private lender that understands people, and no private lending firm is more people-centric than Northwest Private Lending.
2. Don’t use a hard money loan for anything that doesn’t have the potential to make money.
Not all lending options are suitable for everyone, and private loans are a type of loan especially for real estate investors and entrepreneurs who anticipate that they’ll be able to repay the loan in short order. For instance, if you needed funds for a new construction project in Eugene and needed the money quickly, you could use your property as hard money to secure a construction loan and repay the loan as your business opens and generates revenue.
Private money isn’t a long-term financing option, meaning it doesn’t make sense to use private lending as an option to finance anything that doesn’t stand to generate capital. If you have a pending real estate transaction for a piece of commercial real estate that you plan to flip or develop, using hard money to secure a loan is a great option, but if you don’t have any prospects to generate capital, a hard money loan could ultimately hurt you instead of helping you.
3. Don’t underestimate the cost of a new construction project or renovations.
One thing about hard money loans is you can only use a piece of property for one loan at a time. That means if you get a loan for a new construction project and underestimate your costs, you could be stuck with an unfinished project.
You need to figure out how much the project will cost you before you begin looking for lenders. You also need to plan for unexpected costs to arise and give yourself some room for error. If you’re putting a new roof on your restaurant and you know that your HVAC system is on the fritz as well, you should go ahead and put a contractor from DirectAC in your budget as well, instead of handling renovations and then upgrading your appliances as a separate project.
When you get a hard money loan to give your business a facelift, you can’t be afraid to invest in the best products and supplies for your business. For instance, if you own a restaurant and are trying to give your dining room a new look, invest in premium quality by contracting a company like Tartin Wood that has a long reputation of customer satisfaction and doing excellent work.
4. Don’t miss your payments.
Of course, it’s elementary that when you borrow money, you have to pay it back—otherwise, it’s not borrowing. However, when you use your property as hard money to secure funding from a private lender, it’s even more critical that you make your payments when they’re due.
Whenever you get a private loan and use something valuable as hard money to secure it, you’re betting on yourself, so don’t let yourself down. Use your loan wisely and make your payments on time to ensure the security of your real estate transaction and your hard money.
5. Be wary of upfront costs.
Even though private money lenders tend to move much faster than conventional lenders, you still need to be wary of the process. For one, some private lenders will charge you appraisal, inspection, and lawyer fees, which is all fine if you get the loan. However, if you go through the same process with multiple lenders and never secure a private loan, you’ll end up losing a lot of money and sleep for nothing.
When you’re doing your research and looking for lenders, you should look for their upfront costs. Be sure to shop around and compare to find the most affordable option. There’s no need to pay for a bunch of services when there’s no guarantee that you’re going to get the loan you’re seeking.