Hard money is a unique form of private lending that tends to be very specific in application. Hard money loans are used for a limited number of purposes, compared to personal loans and other forms of financing. What are those purposes, exactly?
The question is best suited for a hard money firm like Salt Lake City’s Actium Partners. Actium provides hard money and bridge loans in Utah, Colorado, and Idaho. They explain that the vast majority of hard money loans are in some way dedicated to real estate investments.
Armed with that knowledge, I did a bit of research. I turned up four standard uses for hard money in commercial real estate:
1. Speedy Property Acquisitions
One of the big advantages hard money brings to the table is the speed at which lenders can get to closing. A traditional lender might need months to approve, underwrite, and fund a sizable real estate loan. Firms like Actium Partners can do it all in a matter of days. For real estate investors, that is a big deal.
The property investment game is played at a very fast pace. More often than not, sellers looking to unload valuable real estate sell to the buyer who can get to closing the fastest. That being the case, investors cannot afford to wait on traditional financing that could take months to arrange. When an investor does not have the luxury of time, hard money is the go-to funding source.
2. Bridge Financing
The nature of hard money lending is such that property investors may need to arrange additional financing later on. Here is how they do it: they obtain a hard money loan to acquire a new piece of property. Over the next several months, they arrange traditional financing that will pay off the original loan. In such a scenario, the hard money loan becomes a bridge loan.
Bridge loans are so named because they bridge the gap between an immediate funding need and a future source of funding. Hard money is ideal for bridging gaps between real estate acquisitions and expected sources of income.
3. Property Flip Scenarios
Although Actium Partners doesn’t get involved in property flipping deals, there are other hard money lenders that love this sort of thing. They provide funding that allows investors to purchase commercial properties, renovate them quickly, and get them back on the market – hopefully at a considerable profit.
Among all types of hard money loans, those designated for property flip projects are considered the most risky. Property flipping is an extremely risky way to make money in real estate. Why? Because markets can turn on a dime. A real estate investor could forecast a 50% margin on a new property only to have the market turn south in the midst of his renovations. He could be left with a much smaller margin or, worse yet, take a loss on the property.
This type of risk is not lost on hard money lenders. Risky properties represent risky loans. That’s why so many hard money lenders are cautious with fix and flip projects.
4. Other Non-Traditional Scenarios
Last but least is a collection of non-traditional scenarios the banks are reluctant to get involved with. Consider the investor who doesn’t have traditional W-2 income. His income is derived mainly from capital gains. That tends to make banks nervous because it is harder to verify the investor’s ability to repay.
This sort of thing does not concern hard money lenders because they offer asset-based lending. And asset-based lending strategies are what make hard money loans so attractive to property investors.
