Commercial real estate investment currently ranks as one of the most lucrative ways of accumulating and building wealth over a reasonable span of time. 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 major metropolis/cities across the country, it is safe to assume that this is likely to remain the norm for several decades to come. Besides, a decent sprinkling of strategic commercial real estate pieces is largely considered an effective way of diversifying one’s investment portfolio.
Speaking of commercial real estate investment, there exist a couple of avenues that you can use to buy a piece of what has proven to be a profitable venture. One of them is by investing passively through real estate crowdfunding or real estate trusts ( REITs ). Although this works significantly well on a case-by-case basis, many investors prefer to pool cash into something that they can own directly. The downside to this 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 the recent times ), 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 of growing an impressive commercial real estate investment portfolio within the shortest time possible. If anything, a majority of smart and astute building flippers prefer sourcing funds from private lenders than mainstream lending options such as banks and credit unions. Reason being; 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 smart applications of hard money loans that you can adopt.
1. Use Hard Money Loans to Work Around Your Lack of Credit Worthiness
Mainstream financial institutions ordinarily use one’s credit worthiness 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 here and there can lock you out of the race of acquiring a gem of areal estate nugget. Hard money lenders, on the other end of the spectrum, utilize the market value of the property to determine how much money they can line your bank account with, to be more specific, the after repair value (ARV ) of the property. Which, of course, is usually an approximate estimate of the worth of the property after 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 if you have 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 that is a 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 loss of crucial market timing advantage should the funds take several months to be fully released to them, something that 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. Which 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 any of the usual red tape that accompanies credit unions or bank financing.
3. Hard Money Loans as a Wedge Against Lengthy Repayment and Mortgage Periods
Hard money loans is an excellent outfit for wealthy commercial real estate investors who would 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 make use of hard money loans to leverage large sums of funds and do numerous fix-and-flip property projects at a go. The same is barely possible for a young investor when relying on mainstream financing sources due to the colossal amount of monies needed to fund such mammoth undertakings. But making good use of the way hard money loans are structured, you can leverage enough capital to oversee even ten fix-and-flip projects concurrently. A smart investor would then use the profit from the overhead to grow his commercial real estate portfolio even further.
Besides, simple profit-loss arithmetic will reveal to you that it is more cost-effective, hence 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, than for each one you can do so individually with cash.
5. Make Use of the Extensive Experience of Seasoned Hard Money Lenders to Increase your ROI
Hard money lenders, unlike conventional bankers, are quite experienced and seasoned in the dynamics of commercial real estate investing such as profitable fix-and-flips. They can offer you valuable insider tips and guidance that can significantly improve your venture’s bottom line. Also, the extra set of eyes as they go over your hard money loan appraisal can easily spot some of the weakness/deficiencies in your commercial property investment model that you may not have picked up at first. Some of these can significantly reduce your chances of landing into common pitfalls such as buying into an already saturated market.
In addition to this, hard money lenders could also provide critical industry connections and real estate networking gems that can be extremely profitable and valuable, especially if you’re new to commercial property investing.
6. Avoid the Limitation of Cash-based Investing
Hard money loans hold the key to expanding your commercial real estate portfolio without being limited to the amount of personal savings or property collateral that 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 is immediately limited to the extent of disposable cash resources that you have.
On the other hand, hard money loans allow you to go above and beyond the realm and limitation pegged by your personal savings. In fact, successful and shrewd commercial property investors will 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, thereby improving one’s ROI margin significantly, and still hold on to their cash.
7. Employ the Versatility of Hard Money Loans to Buy Into Distressed Property
Distressed property, contrary to what most people know, is a ripe investment ground for an investor who can leverage their current commercial real estate holdings to expand their portfolio 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 with the intent to unloading it as fast as possible to recoup their financial expenditure. For this reason, the bank will try to dispose of the real estate collateral in the open market first via auction, and if there is no suitable buyer, 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 lending institution dealing with the distressed property; their primary goal is to recoup their loss ( and not to make a profit from the sale. ) This opens up a rare opportunity of acquiring prime assets at a highly discounted price. And in line with this, some hard money lenders have tailor-made same-day loans specifically meant to oil such deals involving undervalued distressed property. And such loans can be offered on 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 with the intention of disposing it off, once its value has appreciated. And as you wait for this happen, it is also practical to rehabilitate the property a bit and rent it out to willing tenants in the meantime. It goes without saying that you need a significant wad of cash to take purchase foreclosures for a buy and hold scheme. And this is where the versatility of hard money loans comes in handy.
Unlike traditional lenders who limit their loans to prime first-rate commercial properties or on good owner-occupied basis (read 70% occupancy rate), private capital investors specializing in hard money loans usually have no qualms loaning you the necessary capital to buy off foreclosures, so long you are a seasoned investor and have a proven track-record of improving the property’s profile post purchase. This is something that would be significantly hard to convince a bank or credit union to do. Besides, the flexibility of hard money loan terms implies that you can tinker with 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 in realizing a cash-out refinance loan for a commercial real estate property. This is where you choose to pay off an existing real estate mortgage ( in a 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 your liquidity even when facing low credit scores, foreclosures or prior bankruptcies without having to jump through hoops to convince lending facility of your credit worthiness.
Hard money loans represent an excellent investment vehicle for building and expanding one’s commercial real-estate investment portfolio. Especially if one is facing potential bankruptcy, has a history of defaulted loan repayments or is generally not considered creditworthy. Thanks to hard money loans, now you don’t have to miss the bus to securing your future only because you can’t raise enough cash to settle a down payment. Furthermore, unlike your average loan appraisal and approval process – which can drag on for months as the bank reviews your business’ financial healthy – it is possible to secure multi-million dollar hard money loans from private capital investors in less than three days.