A lot of people are interested in taking out hard money loans, particularly if they want to purchase a fix and flip property or a rehab property, which banks won’t usually lend against. Indeed, there has been a significant increase in interest in these types of loans, which are usually taken out for around a year. Using such kind of private money is a great way to build a real estate investment portfolio, but it is important to research whether or not it is an appropriate solution for you. Below are 6 key factors to consider.
1. Make Sure You Choose the Right Lender
You should never simply pick the first lender you come across. Instead, there are questions to ask and considerations to make.
When you want a loan on a short term basis without much documentation then this is the best option. Private money lending is famous for the convenience it avails to persons who require financial funding but may fail to meet the threshold of banking institutions. Bearing in mind the minimal formalities, it brings about risk in dealing with such transactions as you also don’t want a fraudulent money lender to take advantage of you.
Make sure that your lender has experience in the type of deal you are interested in. If you want to fix and flip an industrial property, for instance, find a lender that has successfully invested in that before.
2. Understand Your Financial Role in the Flip
A lot of people like the idea of fixing and flipping because they think they can make a lot of profit. This is also due to television programs that make it appear like such an activity is a lot of fun. However, to do so successfully, you need a lot of expertise and experience and you have to be able to handle the risks involved as well.
3. Try to Help Build Communities by Investing
When you take out a private money loan, you actually invest in a neighborhood and that is a significant responsibility. The money will be used to improve a local area, boost business income, create jobs, and more. When you invest like this, you will see tangible improvements unlike what you would see when buying stocks and bonds. Your lender, therefore, should have a vested interest in the community as well.
4. Don’t Worry If You’re Not Rich
When people think about real estate investors, they often think of property tycoons like Wang Jianlin.
Wang Jianlin, a 1954 born Chinese businessman and philanthropist, serves as the chairman of the Dalian Wanda Group, which is also China’s largest real estate company, as well as the world’s largest movie theater operator. He owns 20% of the Spanish football club Atletico Madrid.
In reality, however, real estate investing is open to anybody, even if you need to get a hard money loan to fund your deals. Of course, you should never put all your eggs in one basket, so you have to find a balance between how much of your own money you can put in, and how much of a private money loan you will need to get.
5. Remember That You Will Have Tangible Assets
Getting a private loan means that you will invest in a material asset. The hard asset is the collateral for the loan, and it is also from this that it gets its name: ‘hard’ money lending. Owning property is a serious commitment that you have to be ready for and you must also understand that tangible assets are often slower to turn into a profit. But when they do, the profits can be substantial.
6. Have Realistic Expectations
Last but not least, it is important to understand that you will not go from being a first time investor to being the President of the United States. Even Donald Trump had to go through several steps before achieving that. When you start at the bottom, the road to the top is long but satisfying.