If you need short-term capital and cannot wait months for a bank to review your commercial property loan application, hard money can get you to the finish line.
But it will only work in your favor if you use it for a defined purpose and have a solid exit plan, because you might lose the spread you expected to make otherwise.
Here are 8 practical ways you can use hard money loans to pursue stronger returns.
1. Buy an underpriced property faster than other interested investors.
Some commercial real estate deals are time-sensitive.
If the seller wants to close quickly, there simply won’t be enough time to wait for bank financing, so other investors who have more liquidity may beat you to the contract.
That’s why it’s important to have access to a hard money lender that specializes in CRE.
They will most likely be better at reading the deal than a bank, so you can get an answer before the opportunity disappears.
Did you find a small retail strip with tenants in place, priced below market because the owner needs to sell quickly?
You use a hard money loan to buy the asset fast and then refinance into a lower-cost commercial loan once the deal is under your control. This lets you capture the discount.
2. Bridge the period before permanent financing
Some commercial properties have strong long-term potential but simply don’t yet have the rent history or occupancy level banks normally want to see.
You can use a hard money bridge loan to complete that interim step.
Is there a small office building that you want to buy because the location is proven and stable tenants have already signed leases, except that those tenants haven’t moved in yet?
Many traditional banks that don’t understand CRE will hesitate to fund that acquisition because technically, the income hasn’t started coming in.
In this case, you can use hard money to close and then refinance once the tenants occupy the space and start paying rent.
This lets you control the property before the income fully stabilizes and qualify for bank financing on stronger terms later.
3. Acquire distressed properties that banks will not touch
Traditional lenders are known to reject properties with what they consider to be major issues:
- code problems
- heavy vacancy
- deferred maintenance
- environmental concerns
- tax liens
Because they’re often CRE specialists themselves, hard money lenders are more receptive to properties with correctable problems.
They understand that distressed commercial properties can absolutely be rehabilitated and made profitable.
Did you find an outdated warehouse located near an industrial corridor?
Maybe the roof needs membrane replacement, and the loading area cannot handle modern trucks.
Those major repairs may drive banks away. But you can use hard money to buy the property and bring it to a leaseable condition. This lets you create value that did not exist at acquisition.
4. Fund renovations that directly increase rent
Some properties are perfectly usable but can’t command top-of-market rent because of cosmetic problems that are relatively simple to fix.
Hard money will allow you to fund the updates and reposition the asset for better tenants.
Do you own a medical office building with dated suites?
Use a hard money loan to renovate the vacant units and add tenant improvements, so you can re-lease the space at higher rates. Once the rent roll improves, you can then refinance based on the higher income.
Related blog: Different uses of hard money loans
5. Compete at commercial auctions
If you win an auction, you may need to put money down right away and close quickly. Hard money can give you the funds to follow through on the bid.
Let’s say that a foreclosed mixed-use property comes up for auction and you see it sitting below its likely value after lease-up.
With hard money arranged in advance from a lender you know, you can win the property and close within the required deadline.
6. Start construction while waiting for bank financing
Are you ready to start a commercial construction project, but are stuck in financing limbo because the bank has approved your traditional construction loan application, but hasn’t released the proceeds?
Hard money can front the “get-started” funds you need to lock in contractor availability and discounts. You can use hard money to keep the project timeline intact and reduce the risk of pushing the project into a costlier season.
7. Refinance out of a loan problem
Hard money can come to the rescue if the clock is ticking on your balloon payment.
Let’s say that you renovated your multifamily apartment building to bring dated units up to market expectations, and occupancy dropped during that period.
Your balloon payment is now due in 45 days, and the bank refuses to refinance until the rent roll improves.
You can use hard money to pay off the maturing loan and finish the remaining work, and then lease the vacant units and pursue a conventional refinance once the property qualifies.
This lets you avoid a forced sale or foreclosure.
8. Pull equity from a property you already own
Do you own a commercial property with substantial equity, and want to use that equity to fund your next deal?
That’s possible with a hard money cash-out refinance.
The hard money lender uses your existing property as collateral and provides cash at closing, which you can then apply toward the purchase of another commercial building.
Once you’ve stabilized the new asset, you can refinance one or both properties into longer-term debt.
It’s a good way to turn idle equity into acquisition capital while keeping ownership of the original asset.
More information: 9 Ways Hard Money Loans Will Help You Build a CRE Portfolio
The bottom line: Use hard money only if you have a solid and realistic exit plan
Hard money loans work best when you know two things:
(1) exactly how the loan will create value and (2) how you will pay it off. Before you borrow, run the numbers through the full payoff.
If hard money costs erase the profit, the deal may not be worth doing.
And if you need capital for a time-sensitive commercial real estate deal, talk to our team here at Private Capital Investors.
We are direct CRE lenders specializing in providing hard money loans in the $2 million to $50 million range, with closings possible in as little as two weeks.
Related Blog: Guideline on Hard Money Qualification Requirements and Approval Process
Other sources
https://www.investopedia.com/terms/h/hard_money_loan.asp
https://mofinloans.com/blog/bridge-or-hard-money-financing/
https://www.financeboston.com/commercial-cash-out-refinance/
