Hard money loans are pretty common these days. Although hard money lending faced a serious setback during the last housing crash and financial crisis, it has made a strong comeback ever since. The interesting thing is that most of the hard money these days goes toward real estate. There is a simple explanation we will explore in this post.
Before getting to that explanation, it is important to understand what a hard money loan is. It is a loan offered based on the value of a hard asset offered as collateral. In nearly every case, that collateral is real estate. If the value of the property being offered is enough to cover the amount being requested, approval is usually forthcoming.
Lending to Commercial Borrowers
At this point, it’s also important to know that hard money loans for real estate almost always go toward commercial transactions. In other words, hard money lenders like Salt Lake City-based Actium Partners make loans to people buying commercial properties. They do not offer residential mortgage loans. Residential mortgages are left to banks, credit unions, and private mortgage lenders.
The types of commercial properties obtained via hard money include:
- Undeveloped land.
- Improved but undeveloped land.
- Office buildings and complexes.
- Strip malls and other retail buildings.
- Warehouses and distribution centers.
- Industrial complexes.
- Multi-unit apartment buildings.
- Multi-family rental units.
Quite a few hard money lenders write loans to fix and flip investors. Even though such investors are purchasing and renovating residential properties, their businesses actually operate as commercial enterprises. Therefore, loaning on fix and flip projects is considered commercial lending.
Acquiring Property With Loans
We finally get to the part of the post that deals with why most hard money goes toward real estate. Here is the simple explanation: acquiring property with traditional bank loans is very difficult. It is difficult enough just to get a mortgage or a loan to buy commercial property for your business. But when you’re talking about obtaining commercial properties as investments, traditional lenders are reluctant to get involved.
Take Actium Partners. The previously mentioned hard money lender funds real estate acquisitions in Utah, Colorado, and Idaho. Nearly all of their clients are investors. Those investors could go to traditional financial institutions to apply for funding, but they would have a much harder time getting approval. Traditional lenders hesitate because real estate investing can be risky.
However, there is one way to get banks and credit cards involved in commercial property investments. It is illustrated by a loan Actium made some years ago. Actium funded the acquisition of a multi-unit apartment property in Utah, a property the investor’s bank didn’t want to get involved with. But once the property was acquired and began generating monthly income, the bank’s position changed. They were more than happy to write a loan so that the investor could pay off Actium. The scenario is actually a pretty common one.
It Boils Down to Risk
It really boils down to risk for traditional lenders. They need to be very careful about managing their risk, which is why they are nervous about real estate investments. There are never any guarantees in real estate, or any other kind of investment. Risk is part of the equation.
Investors prefer hard money for obtaining real estate because it is easier and faster to get. Meanwhile, hard money lenders are willing to take the risk because the reward for doing so is quite generous. It’s an arrangement that suits both parties while keeping banks in credit unions out of the equation. In the end, everyone walks away happy.