Property investors have plenty of options for financing new acquisitions. They can rely on old-fashioned bootstrapping. They can recruit other investors to help them by contributing to an investment fund. They can even go to conventional lenders in hopes of getting loans. But for many property investors, the only choice is hard money.
Whether it is straight hard money or a bridge loan, property investors know that hard money gives them an edge. It gives them a competitive edge for acquiring new properties. It also gives them an edge in the pursuit of building a robust portfolio with the potential for an extraordinary ROI.
This post will get into how hard money does what it does. But before getting to that, a brief introduction to hard money and bridge loans is a good idea.
Loans Made by Private Lenders
Both hard money and bridge loans are loans made by private lenders. They are short term loans, rarely exceeding 24 months. A 6–12-month term is typical. In addition, hard money and bridge loans tend to have higher interest rates than their conventional counterparts.
Both types of loans are normally structured as interest only loans. This means that borrowers only pay interest from month-to-month. The amount borrowed is only repaid at loan maturity. In some cases, a borrower can repay a loan early without facing a penalty.
Hard Money Is Fast
As for how hard money loans offer property investors an edge, let us start with speed. Underwriting for hard money and bridge loans is simple and minimalistic. Approval is based exclusively on collateral value. When you combine these two things together, you end up with a scenario in which a lender does not need a lot of time to approve and underwrite.
Actium has been known to approve and write loans in as little as one business day. Property investors with access to funding in such a short amount of time have an advantage. Why? Because the investor who can get to closing the fastest often wins the deal.
Hard Money Protects Cash
The fact that hard money and bridge loans are usually interest only loans means that a borrower’s cash position is protected. The borrower is spending less cash each month because payments are limited to interest alone. Precious cash can be put into new deals or rehabbing currently owned properties.
Having money to put into new deals gives a property investor that competitive edge. If an investor can buy two or three properties with hard money as opposed to a single property with a conventional loan, hard money makes him more competitive. More properties generate more income and build more equity faster.
Hard Money and Interest Rates
Lastly, hard money and bridge loans tend to have fixed interest rates. Those rates may be higher than conventional loan rates, but interest rate alone does not determine the total amount of interest a borrower pays. Total interest is a combination of interest rate and loan term.
Put another way, the longer a loan needs to be serviced, the more total interest a borrower pays. A borrower will pay more interest over a 30-year loan than he will a 2-year loan, even if the shorter loan has an interest rate that is several percentage points higher. All of this is to say that hard money and bridge loans can actually cost less when all is said and done.
Property investors looking for a competitive edge should not dismiss hard money and bridge loans. Both types of loans could be the deciding factor in how well an investor competes.