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The Dangers of Falling for Private Lending if You Can't Pay It Back
You could lose your house. It could be 2008 all over again.
Many private money borrowers don’t plan to repay their loans.
You should plan to repay your loans if you are using hard money, high-interest loans, or short-term money or else you could lose your investments.
A tip for planning to repay your hard money loans is to keep track of the loan amount in a spreadsheet and the interest charge that is being added to your cash flow. Just do the math and calculate the interest portion of your loan and that is how much extra expenses you are taking on. Mortgages charged by private lenders are calculated differently than amortized mortgages and are called interest only loans because they do not repay the principal. You should have a way to service that expense or you should not take it on. That means that you should have a way to pay it back.
The interest expense might mean not eating at McDonalds as much.
Reasons you might need private lending
You might need private lending to afford the repairs your house needs. I got this idea from TorontoLife.com.
I have also seen people need private lending because they fell into a difficult financial circumstance that has recently gotten better so they could afford to service the debt they are taking on. But, the reality is that a quarter to half of those people fell back into financial problems because their job, health, and/or marriage problems turned out to not be completely over.
I am concerned that the same people that are taking on real estate investing as a new career are the same people that have job, health, and marriage problems — problems that make them require a private lender. If you are a real estate investor you could deal with cash buyers only to get an interest in property without carrying a mortgage; Cash buyers could fund the deals that you find for them and you could negotiate a 50% interest in the cash flow from the property.
Private lending for real estate investing should be used intelligently as a strategic tool for leverage. When done properly leverage can increase your net worth. Big corporations carry debt, or leverage, because it increases their firms values. The way that you can tell if leverage is right for you is to compare the interest rate that you are paying on the private loan with the ROI of your investment or assets. Your ROI should be larger than the interest rate on your loans or you are doing it in an unintelligently manner.
If you are taking out credit card debt or high interest loans to start a new career in real estate estate investing when you have a difficult circumstance already, then you are probably taking on too much risk. This means that you could lose your house.
What have you done to pay back your hard money loans?
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