Is Hard Money a Good Funding Tool for Landlords-to-Be?

Investors have been making money in real estate for generations. One way to do it is to buy properties and then rent them out. Both commercial and residential landlords can make a solid return on their investments by building a strong portfolio of properties that generate monthly income for as long as those properties are held. How are they financed? Hard money is one option.

Actium Partners is a Salt Lake City hard money firm that makes loans in Utah, Colorado, and Idaho. They say the vast majority of their loans go to commercial real estate investors looking to be landlords. Investors use the loans to acquire everything from strip malls to office buildings and multi-unit apartment properties.

If you are looking to become a landlord yourself, hard money might be a useful financing tool. However, you might struggle to get hard money loans on your first few acquisitions. Hard money gets easier the further along you go.

Hard Money in a Nutshell

In a nutshell, hard money is so named because lenders require a high-value hard asset to act as collateral on the loan. When you are talking landlords looking to acquire new properties, the properties themselves act as the collateral. Real estate is considered a hard asset because it is tangible. It is also easily liquidated.

To finance a new acquisition with hard money, you would put together a proposal and submit it with your loan application. Your proposal would include details about the property, its current value, and your exit plan – which is to say how you intend to pay off the loan at maturity. The lender would appraise the property before an approval decision is rendered.

Why It’s Worth Applying

Although new investors may have some difficulty obtaining hard money loans on their first few properties, applying is still worthwhile. There are multiple things that make hard money more attractive than conventional funding:

• Credit Score Doesn’t Matter – Borrower credit score doesn’t matter in terms of loan approval. Loans are approved based on the value of the collateral. Credit score only comes into play for some lenders in determining interest rates and terms.
• Fewer Documentation Requirements – Hard money lenders require a lot less paperwork and documentation. With hard money, you are not likely to get repeated phone calls every few days from a loan officer looking for more documents.
• Approval and Funding Are Faster – Because hard money lenders base approval decisions on collateral, those decisions can be rendered very quickly. They can also process and fund loans in days, rather than months, because their underwriting process is so much faster.

The primary disadvantage of hard money is that it comes with a higher interest rate. There are several reasons for this, beginning with the fact that lenders take more risk on real estate loans. Second, terms are a lot shorter – usually two years or less. That gives lenders significantly less time to earn their money.

You Have Nothing to Lose

As a landlord-to-be, you may need financing to obtain your first few properties. You have nothing to lose by applying for hard money. The worst that can happen is that your application gets turned down. It will not have any impact on your credit report or score because hard money lenders do not look into either one for approval.

Hard money can be an amazingly effective financing option for landlords. Anyone looking to begin acquiring rental properties should at least investigate how hard money works. Hard money tends to be more appropriate than conventional financing for obtaining rental properties. It just works better all the way around.

Ashton Erdman