The Most Dangerous Thing That Happened to Real Estate Investors Was Making It Easier to Get a Loan I started in this business when hard money was the only game for flippers and small builders. 40 to 50% down. 13% interest. Two points in. Short fuse. You know what those terms did? They filtered. If you couldn’t pencil a deal at that cost of capital, you didn’t do the deal. You had to be right on the buy, right on the rehab, right on the exit. The math either worked or it didn’t. That was the old stupid tax. Painful terms that filtered who got in the game. Fewer qualified buyers meant less competition. Less competition meant better basis, wider margins, more room for mistakes. The cost of capital was ugly, but the deals it let through had a built in cushion. The new system flipped all of that. Private credit funds backed by firms like KKR started offering small investors short term loans to build or flip homes. 90% of after rehab value. 8% interest. Minimal experience required. They called it democratizing real estate investing. 90% of ARV at 8% didn’t just open the door to inexperienced borrowers. It flooded the market with them. More buyers chasing the same deals meant compressed margins and thinner cushions. And the people operating on those razor thin margins were the least equipped to handle anything going wrong. Stack the stupid tax on top of a market with no margin of safety, and the losses aren’t just likely. They’re guaranteed. In Cape Coral, Florida, private lenders have started foreclosure on 7.4% of properties they financed in 2023. Normal mortgages go bad at less than 2%. Foreclosure filings quadrupled in two years. (Source: Bloomberg, Forecasa Inc.) John Upperman, a procurement specialist from North Carolina, heard about Cape Coral on a podcast. Never set foot there. Bought two lots. Borrowed $264,000 per project. His contractor stalled. One house sat as a concrete shell, for sale sign face down in thigh high grass. He expects to lose $120,000 combined. ”When others are greedy, be careful. I should have heeded those words.” Dave Diaz, a local builder, picks up the pieces. Surgeons, tech workers, a woman who drained her father’s IRA for three stalled houses. Diaz estimates his clients lose $75,000 on average, even if they finish and sell. The lenders call him too now. “I’m the turnkey, make it go away guy.” Cheaper capital didn’t make better deals. It made more buyers, higher prices, and thinner margins on every one of them. Glen Weinberg, a hard money lender for over two decades, still requires 40% down at 13%. “You can increase returns when the world is good. But as soon as the market turns and you’re using that much leverage, your losses are exponentially amplified.” What do you think about these high leverage loans for house flippers? https://lnkd.in/eNRqXYTw