Commercial real estate investment currently ranks as one of the most lucrative ways of accumulating and building wealth over a reasonable period.
If history teaches us anything, and what we have all witnessed recently with the rise-and-fall of the market value of some of the prime properties in significant metropolises/cities across the country, it is safe to assume that this will likely remain the norm for several decades.
Besides, a decent sprinkling of strategic commercial real estate is an effective way to diversify one’s investment portfolio.
Speaking of commercial real estate investment, there are several ways to buy a piece of what has proven profitable. One is to invest passively through real estate crowdfunding or real estate investment trusts (REITs).
Although this works significantly well on a case-by-case basis, many investors prefer to pool cash into something they can own directly. The downside is that you require a colossal amount of liquid cash or near-cash assets to make any meaningful investment through this method.
Unfortunately, not many people can afford to part with such vast sums of money upfront as it is typically required.
And with most banks/financial institutions hesitant to lend credit to real estate investors (due to the high number of defaulters & non-performing loans witnessed in recent times), commercial hard money loans seem to be the only practical option to most speculative and long-term buyers.
Relying on hard money loans as a short-term and profitable lending instrument may have its downsides – compared to traditional financing – but it is also one of the best ways to grow an impressive commercial real estate investment portfolio within the shortest possible time.
Most brilliant and astute building flippers prefer sourcing funds from private lenders to mainstream lending options such as banks and credit unions. The reason is that it is easy/convenient to build a profitable commercial real estate portfolio via this financing solution.
And if you’re wondering how this is even feasible, here is a detailed look into some of the innovative applications of hard money loans you can adopt.
1. Use Hard Money Loans to Work Around Your Lack of Creditworthiness
Mainstream financial institutions ordinarily use one’s creditworthiness to calculate how much they can lend a borrower plus the maximum allowable payback time.
This means that a history of defaulting payments in the past or a few foreclosures can lock you out of the race of acquiring a gem of a real estate nugget.
On the other end of the spectrum, hard money lenders utilize the property’s market value to determine how much money they can line your bank account with or, more specifically, the property’s after-repair value (ARV ). Which, of course, is usually an approximate estimate of the worth of the property once the development or the renovation phase is over.
In other words, you can still access hundreds of thousands of dollars in credit through hard money loans even with a poor credit score.
For a startup real estate investor who has just started dabbling in the commercial property market, this can mean the difference between his first ‘lucky break’ and a series of agonizing and unsuccessful meetings while trying to secure initial funding.
2. Secure Funding with a Very Short Timeframe Using Hard Money Loans
Any real estate investor who has been around for some time is familiar with the lengthy loan appraisal and approval time characteristic of most traditional financing options.
In some cases, this can run into several months before a sizable loan – read millions – is approved, and even then, some institutions tend to release the funds in bits rather than in one lump sum figure to maintain their market liquidity.
For a speculative commercial property investor, this means a loss of crucial market timing advantage should the funds take several months to be fully released, which can tank their end profits immensely.
On the brighter side, a good chunk of private capital investors can process your hard money loan in as short as 48 hours and proceed to release the funds fully to you.
This can also be crucial if you’re trying to source funding for a large-scale urban development project that has a strict completion deadline. All of this without the usual red tape accompanying credit unions or bank financing.
3. Hard Money Loans as a Wedge Against Lengthy Repayment and Mortgage Periods
Hard money loans are excellent for wealthy commercial real estate investors who wish to skip the long repayment time that is the norm for conventional loans and mortgages.
Depending on the nature or landscape of your real estate portfolio, a lengthy stipulated repayment period by the bank( in the range of dozens of years ) may not be profitable in the long run for you – factoring in a fluctuating interest rate.
For this reason, it is common for most well-heeled commercial property buyers to prefer the shorter ( and more flexible) repayment terms offered by private lenders, especially if they are on a fix-and-flip real estate spree. Such an investment model hardly works with conventional financing from traditional lending institutions.
4. Use Hard Money Loans to Leverage Your Financial Capability
Some of the most successful commercial real estate investors use hard money loans to leverage large sums of funds and do numerous fix-and-flip property projects at a go.
Due to the colossal amount of money needed to fund such mammoth undertakings, the same is barely possible for a young investor when relying on mainstream financing sources.
But by using the way hard money loans are structured, you can leverage enough capital to oversee even ten fix-and-flip projects concurrently. A clever investor would then use the profit from the overhead to grow his commercial real estate portfolio even further.
Besides, simple profit-loss arithmetic reveals that it is more cost-effective and profitable to flip multiple houses at a time than doing the same individually.
Ordinarily, a sizable hard money loan gives enough financial muscle to rehabilitate and sell four derelict commercial real estate pieces, and you can do so individually with cash for each one.
5. Make Use of the Extensive Experience of Seasoned Hard Money Lenders to Increase your ROI
Unlike conventional bankers, hard money lenders are experienced in the dynamics of commercial real estate investing, such as profitable fix-and-flips.
They can offer valuable insider tips and guidance to improve your venture’s bottom line significantly.
Also, as they go over your complex money loan appraisal, the extra set of eyes can easily spot some of the weaknesses/deficiencies in your commercial property investment model that you may not have initially picked up.
Some of these can significantly reduce your chances of encountering common pitfalls, such as buying into a saturated market.
In addition, hard money lenders could also provide critical industry connections and real estate networking gems that can be highly profitable and valuable, especially if you’re new to commercial property investing.
6. Avoid the Limitation of Cash-based Investing
Hard money loans are key to expanding your commercial real estate portfolio without being limited to the amount of personal savings or property collateral you can raise.
If anything, one of the rookie mistakes that new commercial property investors make is opting to self-finance their first projects instead of leveraging the usefulness of hard money loans.
Remember that when you decide to self-finance a venture, the scale and size of the project are immediately limited to the extent of disposable cash resources you have.
On the other hand, hard money loans allow you to go above and beyond the realm and limitations pegged by your savings. Thriving and shrewd commercial property investors rarely use their cash/savings to expand and grow their investment portfolios.
Instead, they take advantage of the fact that you can use hard money loans to buy into multiple projects at a go, improving one’s ROI margin significantly and still holding on to their cash.
7. Employ the Versatility of Hard Money Loans to Buy Into Distressed Property
Contrary to what most people know, the distressed property is a ripe investment opportunity for investors who can leverage their current commercial real estate holdings to expand their portfolios at a fraction of the current market value of a new unit.
The rare opportunity to do this presents itself whenever a lender or bank repossess prime commercial property, intending to unload it as fast as possible to recoup their financial expenditure.
For this reason, the bank will first try to dispose of the real estate collateral in the open market via auction, and if no suitable buyer is found, it will flip it to the general public.
The problem typically comes in when a commercial real estate investor cannot raise cash as fast as the repossessing instructions require it. Bear in mind that the primary goal of a lending institution dealing with distressed property is to recoup its loss (and not to make a profit from the sale).
This offers a rare opportunity to acquire prime assets at a highly discounted price. In line with this, some hard money lenders have tailor-made same-day loans to oil such deals involving undervalued distressed property. Such loans can be offered on a term or interest-only basis.
8. Employ Hard Money Loans to Finance a Buy-and-Hold Commercial Real Estate Strategy
Hard money loans provide the ideal investment avenue to implement a ‘buy and hold’ commercial investment strategy. This is where you identify and pick up a slightly undervalued or even a foreclosed commercial real estate property to dispose of it once its value has appreciated.
As you wait for this to happen, it is also practical to rehabilitate the property and rent it out to willing tenants. You need significant cash to purchase foreclosures for a buy-and-hold scheme. And this is where the versatility of hard money loans comes in handy.
Unlike traditional commercial real estate hard money lenders who limit their loans to prime first-rate commercial properties or on a sound owner-occupied basis (read 70% occupancy rate).
Private capital investors specializing in hard money loans usually have no qualms about loaning you the necessary capital to buy off foreclosures, provided you are a seasoned investor with a proven track record of improving the property’s post-purchase profile. However, it would be significantly challenging to convince a bank or credit union to do this.
Besides, the flexibility of complicated money loan terms implies that you can tinker with the terms and conditions of repaying the loan to maximize your proceeds in the long run when undertaking such a venture.
9. Actualize a Cash Out Refinance Loan Using a Hard Money Loan
A hard money loan, if utilized suitably, can come in handy when realizing a cash-out refinance loan for a commercial real estate property. This is where you pay off an existing real estate mortgage (lump sum ) in exchange for a bigger loan than the first mortgage.
This way, the difference between the cash-out refinance loan and the original loan can be settled with a quick hard money loan, especially considering that your credit lines are likely to be dry in such a situation.
It is also a good way to regain liquidity even when facing low credit scores, foreclosures, or prior bankruptcies without having to convince the lending facility of your creditworthiness.
Conclusion
Hard money loans represent an excellent investment vehicle for building and expanding one’s commercial real estate investment portfolio. Especially if one faces potential bankruptcy, has a history of defaulted loan repayments, or is generally not considered creditworthy.
Thanks to hard money loans, you don’t have to miss the bus to secure your future only because you can’t raise enough cash to settle a down payment.
Furthermore, unlike the average loan appraisal and approval process—which can drag on for months as the bank reviews your business’s financial health—it is possible to secure multi-million dollar hard money loans from Private Capital Investors in less than three days.
