Are Hard Money Loans Too Risky for Beginner Investors?
Hard money loans have become a popular financing option for some investors–especially those looking to fix and flip properties for profit. Most people who use these types of loans are experienced investors, but are hard money loans too risky for beginners? Today, we’ll review what hard money loans are, their benefits and risks, and how investors can minimize risks while using them.
Contents of This Article:
- What Are Hard Money Loans?
- Are Hard Money Loans Too Risky for New Investors?
- How to Reduce the Risks of Using Hard Money
- Reduce Risk With a Trusted Lender
What Are Hard Money Loans?
Hard money loans are short-term, asset-based loans secured by real estate. They differ from traditional loans in many ways–from their short-term nature to their more relaxed qualifications. For instance, while conventional bank loans rely on a borrower’s credit score and financial history, Baltimore’s hard money lenders focus more on the value of the property being used as collateral when funding a loan.
Since they’re less focused on a borrower’s financial details, hard money loans can be funded very quickly–often within days. However, it’s important to note that they are short-term, usually lasting between 6 months and 3 years. Additionally, they come with higher interest rates than other loan types, generally ranging from 8% to 15%.
Most investors use hard money for fix-and-flip investments, bridge financing, or other real estate projects that require fast funding. If you plan on using a short-term loan for a rental property investment, you’ll likely need to refinance the loan to a traditional mortgage at the end of the loan term.
Ultimately, hard money loans are a great tool for investors who know how to navigate them and use them for specific projects, but are they too risky for beginners? Let’s discuss.
Are Hard Money Loans Too Risky for New Investors?
Hard money loans aren’t right for everyone–but does this mean they are too risky for beginner investors? Honestly, it really depends. Hard money loans can be risky for beginners, especially those unfamiliar with market trends, renovation costs, or the fast-paced nature of real estate investing. However, if you plan things carefully and know exactly what you’re getting into, they can be a very valuable tool.
If you’re considering using hard money to buy an investment property, it’s important to know the pros and cons. Knowing some of the potential risks can help you decide if this financing method is right for you and your investment plan.
Benefits of Hard Money Loans
- Quick Funding- One of the main benefits of hard money loans is how quickly they can be funded. Most traditional loans take weeks or even months to close, whereas hard money loans can be approved and funded within days.
- Easier Approval- Instead of diving into your credit and financial history, hard money lenders care more about the value of the property you’re looking to finance, as it’ll be used as collateral for the loan. So, qualifying for funding can be easy, even if you’re a new investor with little credit history.
- Flexible Loan Terms- Unlike conventional lenders, hard money lenders will generally work with you on loan terms that suit your needs as an investor. For instance, you can negotiate interest-only payments, loan durations, and how you’ll use the funds from the loan.
Risks of Hard Money Loans
- High Interest Rates and Fees- Hard money loans have significantly higher interest rates than traditional mortgage loans. You’ll also have to pay origination fees, points, and other costs, which can add up quickly.
- Short Repayment Terms- Most hard money loans are short-term, with loan terms ranging between 6 to 24 months. This means you’ll need a clear plan and exit strategy before taking out the loan.
- Risk of Losing the Property- Since hard money loans are secured by the property itself, if you’re unable to pay off your loan, you risk foreclosure. This can be a huge risk for new investors who may not have the experience or budget to handle unexpected expenses.
How to Reduce the Risks of Using Hard Money
Whether you have tons of experience or you’re a beginner investor, it’s important to reduce any risks when using a hard money loan. Here are some of the ways you can reduce risks while using hard money to fund your investment.
- Have a Clear Exit Strategy
- Choose a Reliable Lender
- Carefully Estimate Costs and Timelines
- Understand Loan Terms
- Have a Backup Plan
Have a Clear Exit Strategy
Before taking out a hard money loan, you need to have a solid plan for repaying it. That said, you can take a few different routes depending on your property type and investment goals. For instance, some investors use hard money loans for fix-and-flip projects to renovate the property quickly and sell for a profit. Other investors may use hard money loans temporarily and transition to a long-term loan with lower interest rates after the loan term is up. Whatever you decide, you’ll want to plan carefully to repay the loan in full.
Choose a Reliable Lender
Not all hard money lenders are the same. It’s crucial to do your own research and compare lenders to find the best fit for your investment plan. You’ll want to find someone with a strong reputation, positive reviews, and experience working with investors similar to you. Additionally, you’ll want to look at different lenders’ interest rates and fees, making sure you choose one that offers flexible terms that align with your investment strategy.
Carefully Estimate Costs and Timelines
The last thing you want to do is underestimate renovation costs and project timelines. Not thinking realistically about how much you need to spend and how long it’ll take to renovate the property can be very detrimental. So, to avoid this, you’ll want to get detailed quotes from contractors so you can plan your budget. It also helps to set aside extra money in case you run into unexpected costs during your project.
Understand Loan Terms
Unfortunately, not all lenders are transparent with their loan terms. As such, it’s crucial to carefully read through any piece of paperwork you have with your lender. For instance, you’ll want to know any and all fees you’re obligated to pay, whether that’s origination fees, lender points, or pre-payment penalties. You’ll also want to make sure the loan timeline aligns with your investment plan and understand what happens if you cannot make payments on time.
Have a Backup Plan
You could have the most well-thought-out plan and budget, and things can still go wrong. So, you’ll always want a backup plan and room in your budget to account for any unexpected issues. One thing you can do is line up an alternative financing option in case you need to refinance for some reason. Additionally, you may want to prepare to sell the property at a lower profit in case of market fluctuations.
Reduce Risk With a Trusted Lender
Are hard money loans too risky for beginner investors? Well, it depends. Hard money loans aren’t right for everyone. For instance, if you’re a first-time investor, you may want to explore lower-risk financing options or partner with experienced investors before taking on a hard money loan. However, if you think you’re ready and have a well-researched investment strategy and a clear exit plan, they can be a great tool for investors.
Looking for a hard money lender near Baltimore, Maryland? Look no further than Maryland Hard Money Lenders. Our team of lending professionals can help fund your hard money loan quickly and efficiently. Contact us to learn more about our lending process, or fill out our initial loan application today!
