My introduction to hard money came by way of a conversation with a lender who explained to me how quickly loans can be arranged in the hard money industry. Lenders can put loans together in a matter of days. That knowledge led me to dig a bit deeper into how property investors leverage hard money loans. I learned a lot, to say the least.
For example, I learned how hard money can help build a real estate portfolio faster than conventional financing. It doesn’t really make sense to the untrained eye. But when you learn how property investors do what they do, the strategy suddenly becomes crystal clear.
Hard Money Basics
Hard money is financing made available through state licensed private lenders. Hard money lending is also asset-based, meaning lenders are not concerned with a borrower’s credit history and score. They aren’t even concerned with income. What matters to lenders is the value of the property being acquired. It backs the loan as collateral.
This explains why lenders can arrange hard money loans so quickly. Their underwriting process is fast and simple. Where it could take a bank months to approve and fund a conventional loan, a hard money lender can get a client from approval to closing in days.
Actium Partners, a Salt Lake City hard money lender operating in several states, once got a client from approval to closing in less than one business day. Actium was contacted on a Friday afternoon and had the loan funded on Monday morning. But that is not the point of this post. So let’s move on.
Investors Want to Preserve Cash
Property investors prefer to finance acquisitions for one simple reason: they want to preserve their cash. Some simple numbers illustrate the point well enough. Imagine an investor with $100. He can spend the entire amount on a single property or finance four properties at 25% down. By putting down $25 on each property and then financing the rest, he uses the same $100 to obtain four properties instead of just one.
Preserving cash gives investors more financial resources to work with. Yet the key to making hard money work in this kind of strategy is to focus on properties that start generating income immediately.
From Hard Money to Conventional Funding
Leveraging hard money to quickly build a portfolio works best when hard money loans are structured as bridge loans. A bridge loan is designed to bridge the gap between an immediate financing need and a future source of income. Let us look at a practical example.
Imagine an investor looking at a multi-unit apartment complex. He turns to Actium Partners for a hard money loan to acquire that property. It is structured as a bridge loan with a term of 12 months. He obtains the property, sits on it for 6 months while it generates rental income, then goes to a bank to arrange a conventional loan.
The conventional loan both repays the hard money loan and allows the investor to pull his initial cash investment out. Meanwhile, the property’s rental income covers monthly loan payments and profit. The investor can now take his cash and repeat the same process by obtaining a new property.
In essence, hard money lending allows that investor to continually turn over a designated amount of cash to buy one property after another. As long as each property generates sufficient rental income, he can rapidly build his portfolio in a way that would not be possible if he relied exclusively on conventional funding. It is an amazing thing to see in action.
