Investing in real estate can be an exciting and profitable venture. But there is a lot to think about. Jumping in without giving serious consideration to what you’re doing opens the door to unnecessary risk. For instance, how will an investor finance acquisitions? Hard money is one option. There are others, including conventional financing.
Truth be told, a sizable percentage of real estate investors fund their projects with hard money loans. Any investor utilizing other funding sources should at least consider the hard money concept. Hard money loans are a viable and legitimate alternative that have proved invaluable to the commercial real estate sector for decades.
It’s Private Lending
The first thing to know about hard money lending is that it is private lending. Real estate investors are not going through banks or other institutions. That gives them an advantage right off the bat. Private lenders do not have as many requirements. They don’t force investors to jump through lots of hoops.
Borrowers Are Getting a Service
Real estate investors may avoid hard money because they have heard it is more expensive than institutional financing. Sometimes it is, other times it’s not. But here is the most important point: investors are getting a service in addition to funding. That service is worth paying for.
The service hard money lenders provide is encapsulated in two main points: direct transactions and speed. In terms of the former, investors can apply directly with lenders – no brokers are necessary. Keeping brokers out of the equation reduces the total cost of borrowing.
In terms of speed, understand that no bank can compete with a private lender. Banks generally need several days to approve. Once approval is given, it can take several months to actually fund the loan. Hard money lenders work much more quickly. Approval and funding in a matter of days is normal.
Lenders Know Their Business
Yet another advantage of hard money loans is that the private lenders behind it know their business. Take Actium Partners out of Salt Lake City, UT. The majority of their loans go to commercial real estate investors in Utah, Idaho, and Colorado. Because real estate investing is their bread and butter, they know the business inside and out.
A real estate investor is better off working with a private lender who understands investing, as opposed to a bank officer who knows nothing about the commercial property sector. That loan officer may be limited in the advice he can give. He will likely be limited in his ability to customize a loan product based on individual need.
No Long-Term Commitment
Hard money lending offers an additional advantage in its short-term nature. An investor looking to get a 15-year note from a hard money lender isn’t going to find it. Hard money loans are generally carried for no longer than two years. But that is not a bad deal when you stop and think about it.
Cash flow is critical to a property investor. Tying up a static portion of the budget in a 15- or 30-year loan doesn’t make for good investing. On the other hand, getting in and out in under two years frees up an investor’s capital for more acquisitions. Even though property investing is a long-term proposition, short-term funding makes the proposition more profitable.
There is more than one way to fund real estate investments. For some investors, hard money is the preferred option. Hard money is fast, uncomplicated, and flexible enough to meet the needs of each individual investment. If it is not right for a particular circumstance, the investor has other places to go.