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 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 FLORIDA.
3 Potential Disadvantages Of Using A Hard Money Lender in FLORIDA
Disadvantage #1: Pay Back With Interest
One of the main drawbacks of using a hard money lender is the interest that comes with the loan. While the loan itself provides the immediate capital needed to acquire or renovate a property, it comes at a cost: the interest rate. These rates can often be significantly higher than traditional bank loans, and they can add up quickly over time. It’s important to factor this interest into your financial plan to ensure you can cover both the principal and the interest payments.
For example, if you borrow $100,000 with a 12% interest rate, you’ll pay $12,000 annually in interest alone. This could eat into your profits if you’re not prepared to handle it, especially if the property takes longer to sell or rent than expected.
Disadvantage #2: Need More Money
Hard money loans are typically short-term and come with a fixed amount of financing. While this can be ideal for certain projects, one potential drawback is that you may find yourself needing more capital than initially anticipated. If the repairs on a property cost more than expected, or unforeseen issues arise, you may need additional funds. If you didn’t budget for this, you could find yourself needing to go back to the lender or seek other sources of financing.
For example, you may have estimated $50,000 for renovations, but after tearing down walls, you find you need an additional $20,000 to address structural issues. In this case, you’ll either need to apply for another hard money loan, which could involve additional fees and time, or find alternative funding sources to cover the extra costs.
Disadvantage #3: Return On Investment
Using a hard money loan can delay or reduce your return on investment, especially if you’re working on a rental property. Since you need to repay both the principal and interest, the money you generate from the property may go toward loan payments instead of providing you with a return.
For example, if you borrow money to renovate a rental property and you charge $1,000 per month in rent, but your loan payment is $800 per month, a large portion of the rental income will go directly to servicing the loan. This means you won’t see much of a return until the loan is paid off or you refinance the property. Depending on how the loan terms are structured, it could be a while before you start making a profit, which may not align with your initial investment goals.
Summary
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. 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 FLORIDA will help you figure out if they’re right for you.