Do you remember those late-night TV commercials from the late 1980s and early 90s, the commercials that promised you could become a millionaire in real estate without spending a dime of your own money? The bit about not spending your money was far-fetched, but the basic premise was still true: it’s possible to build incredible wealth in real estate. Hard money can play a crucial role in doing so.
Hard money is a form of private lending. It is the form of lending that Salt Lake City’s Actium Lending thrives on. Actium provides funding so that real estate investors can purchase new property. That funding is repaid by way of traditional financing, the sale of another property, or some other means agreed to by both lender and borrower.
Key Aspects of Hard Money Lending
Building wealth in real estate via hard money loans requires at least a basic understanding of hard money’s key components. Here they are, according to Actium Lending:
Short Terms – Your typical hard money loan has a term of 6-24 months. Rarely do hard money loans extend to three years or longer.
Interest-Only Structure – Although lenders can structure their loans in a number of different ways, most hard money loans are interest-only loans. Borrowers pay just the interest in their monthly installments; the entire principle is due at loan maturity.
Flexibility – Hard money lenders enjoy considerable flexibility in both underwriting and loan structure. They can write loans capable of meeting just about any need an investor might have.
Real estate investors appreciate hard money for several reasons. First and foremost is speed. Actium Lending and its competitors can usually write and fund loans in under a week. Hard money lenders also utilize less complicated underwriting processes that call for minimal documentation and no income verification.
How Wealth Is Built in Real Estate
Wealth is built in real estate through one of two strategies: purchase-resale or long-term rental. Let us look at a couple of scenarios and how hard money facilitates them.
1. Fix-and-flip Real Estate
Although fix-and-flip (purchase-resale) is not as popular a strategy as it once was, plenty of investors still rely on it to make good money. They use hard money loans to acquire and renovate properties. As soon as renovations are complete, the properties go back on the market. Hopefully, they sell for much more than the investor paid for acquisition and renovations.
Over time, the cumulative proceeds increase the investor’s wealth. He can obtain more properties to generate more returns. By leveraging hard money, he can move quickly so that his properties are turned over in a timely manner.
2. Commercial Rentals
An investor uninterested in the fix-and-flip strategy could get into commercial rentals instead. The rental strategy is more long-term by nature. Moreover, it is simple to understand: an investor purchases a commercial property with rental value built in. It could be an office building, a retail center, or even a warehouse.
Hard money is a fantastic tool for acquiring a commercial rental. After acquisition, the investor can obtain traditional financing to pay off the hard money loan and provide some working capital. Monthly rental payments cover his loan payments. Meanwhile, every loan payment represents less debt and more equity.
When it comes time to sell the property, it has both increased in value and provided many years of reliable monthly income. If everything goes to plan, the investor realizes a significant profit based on a combination of equity and real value. It was all made possible through a hard money loan that financed acquisition.
