Even though they are easier to acquire than traditional loans and often have a much quicker processing time, there are a number of risks that come with commercial hard money loans. However, that does not mean that these loans are not good options if you can find ways to minimize risks.
It is no secret that real estate investing and property management are just as risky, if not more so, than any other financial adventure. Some might assume that, because it involves physical properties, there is less fluctuation and more stability. Especially with commercial hard money loans there is an inherent risk of a property being turned into a revenue generating source before the balloon payment of the loan becomes due.
But risks can be managed. They cannot be eliminated, especially if they are based on factors beyond the control of the borrower, but they can be known and accounted for. In fact, if anyone tells you that you can fully eliminate the risks of real estate investing with commercial hard money loans, you should probably run the other way. If that were possible, everyone would be doing it and there would be no opportunity in it.
One of the first things that you can do to minimize risk is to be realistic about performance projections. Many borrowers will give projections based on full occupancy, with rent always being paid, and minimal expense for repairs. But what happens if the property is not filled with tenants? What happens if rental rates fall instead of increasing? While it is not bad planning to anticipate what things will look like financially if all goes as you wish, it is also irresponsible to assume that this is the only possible outcome.
Another aspect of real estate investing that many borrowers fail to take into consideration and that leads to greater risk, is the competition. Properties do not stand alone and to treat them as such will only set you up for failure. It is very important to analyze what is happening with similar properties nearby. This is especially critical with commercial hard money loans, as the borrower does not have time to ride out the swings of a market. If real estate prices are continuously dropping at a time when you are trying to turn a property, it might end up costing you more than you profit.
Attempting to do everything yourself is another liability that many borrowers don’t take into consideration. Especially if this is your first time dealing with commercial real estate, it is incredibly important to get the advice and input of others, as well as capitalizing on their expertise. Doing so will greatly reduce the chance of a mistake being made.
What is the single greatest factor in decreasing risk with commercial hard money loans?
There is so much that is out of your direct control, but being thorough is something that you can always do. The more that you think things through and plan for how to handle unforeseen problems, the less likely you are to be caught completely unprepared. When it comes to commercial hard money loans, you can never have too many contingency plans.
Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.
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