Top 3 Risks of Using Private Money Loans for a Rental Property Investment

Financing a rental property is a capital-intensive venture that often requires investors to take out a mortgage. Many people are familiar with conventional bank laws but often need a high credit score and a rigorous qualification process to get approval. Thus, for better flexibility, speed, and ease, people often turn to private money loans, But every solution has its downsides. 

Are you debating the pros and cons of a hard money loan? Would you like to make an informed decision before you commit? If your answer is yes, stick around because this article highlights the top 3 risks of using private money loans for a rental property investment. 

Top 3 Risks of Using Private Money Loans for a Rental Property Investment

The loan Repayment Schedule is Tight 

The most significant risk of opting for a private loan is that their repayment schedules are often tight. However, investors with high credit scores and the proper credentials can often enjoy discounted rates spread over a long period. Banks can grant individuals loans with as much as 25 years to pay them off at a low-interest rate. 

On the other hand, private firms don't have that luxury of time and are unlikely to agree to terms exceeding 3 years. The average is closer to 18 months, with a high downpayment and collateral. Having a shorter time frame makes your real estate investment riskier. Unforeseen circumstances could render you unable to comply with the terms of your agreement and put you at risk of losing your collateral.   

Terms with High-Interest Rate 

Another risk of using a private money loan is that you could get stuck servicing a mortgage with a high-interest rate. Remember that private lenders are in the business for profits, and since they have a less selective approval procedure, their investment is also at risk. As a result, these lenders recoup their funds by charging high interest of between 9.5% - 14%, unlike bank rates that sit closer to 11% for an unsecured loan.

If the burden of a high-interest private loan isn’t your thing, you should consult a professional. Maryland Hard Money Lenders can provide investors with options for financing their real estate investment without servicing a balloon repayment. 

High Down Payment Requirement

Finally, private lenders often need to be more open to financing an entire project. It's simply bad business to put all your eggs in one basket. In addition, their eligibility criteria are relatively low compared to banks and similar financial institutions, so their risk management strategy involves distributing their limited funds amongst multiple borrowers. 

As a result, investors keen on a private loan need a sufficient downpayment to qualify for approval. Such a requirement makes this financing solution unattainable for individuals with low or no capital. 

How to Choose a Good Hard Money Lender

Compare Rates and Terms

One of the best tips for choosing the right hard money lender is to compare rates and terms. Don't jump at the first private lender that offers you a good deal. You should always shop around and see what their competitors are offering. Many investors make the mistake of using only interest rates as their metric, but you need more than that to give you the complete picture. For a more holistic comparison, use other metrics like loan repayment schedule, late fees, and other charges. 

Choose a Lender that Specializes in Hard Money Loans 

Finding a lender specializing in hard money loans would be in your best interest. Such individuals are already familiar with the process and can streamline your approval and ensure everything runs smoothly. It also reduces the chances of miscalculations that could have adverse effects in the future. 

Find a Local Lender

Besides finding a lender specializing in your loan type, it's always best to go local. A money lender familiar with the area you want to invest in is less likely to have reservations about your application and can assess the potential better. It also saves you the time and energy to persuade them you've chosen the right location rather than a money pit. It'll also be easier to schedule physical meetings, which might be best during the appraisal part of your application. 

Conclusion 

In summary, the top 3 risks of using private money loans for rental property investment include a tight repayment schedule, high-interest rates, and a large down payment requirement. Having a good understanding of these drawbacks can help you make a more informed decision on whether private loans are the best solution for you. Besides, they can also help you prepare suitable buffers to mitigate these cons and come in handy when deciding on a lender. 

Before selecting a suitable hard money lender, remember to compare the rates and terms of your options and choose a local lender specializing in hard money loans.