It is generally not a wise idea to borrow so as to buy securities. But if you are looking to invest in property, borrowing is part of the game. Hard money represents one financing option. Investors can also borrow from traditional lenders or raise money through crowdfunding and peer-to-peer platforms.
Hard money lenders Actium Partners, out of Salt Lake City, Utah, says that hard money is a preferred funding tool for many property investors. Hard money offers a lot:
- Speedy approvals and funding
- A streamlined approval process
- Flexibility among lenders
- Shorter loan terms.
Needless to say, there is a lot to learn about hard money before obtaining your first loan. But once you understand what hard money is all about, it becomes apparent how valuable it is to property investing. More than one investor will not borrow any other way.
Understand the Collateral Principle
The process of utilizing hard money to obtain investment property starts with understanding the collateral principle. Hard money lenders do not follow the same approval process as banks. They do not require financial statements or look at credit histories. They do not turn over every stone to understand every detail of a borrower’s financial past. They are most interested in collateral.
The collateral on a hard money loan is almost always the property being acquired. As a borrower, the property you want to purchase must be valuable enough to provide adequate security on the loan. The lender has to be able to foreclose on the property and sell it should you default. The bottom line is this: the strength of your collateral will be the most important factor in determining whether you are approved.
Submit Your Documentation
Hard money lenders do not require very much documentation compared to banks. However, they do require some. Experienced property investors know what the documentation requirements are in advance. They get their documents together and submit them along with their applications. This speeds up the process considerably.
Have an Exit Plan in Place
With a typical bank loan, the exit plan is as simple as making your monthly payments until the loan is paid off. That is not how hard money works. Most hard money loans are either interest-only loans with balloon payments at the end or lump-sum loans in which the entire amount (interest and principal) is payable on a specified date.
One way or the other, lenders will expect you to have an exit plan in place. They will want to know how you intend to pay off the loan at maturity. They also need to be reasonably confident that you will have the ability to do so. Needless to say, your exit plan is almost as important as the value of your collateral.
Obtain, Exit, Move On
The beauty of hard money as a funding source for property investments is its ability to support portfolio growth. Let us say you want to buy commercial property you can rent out. Use that first hard money loan to obtain that first piece of property. Once the property starts generating rental payments, obtain a traditional bank loan to pay off the hard money loan.
Next, obtain a new hard money loan to acquire a second piece of property. Then repeat the entire process. Each property acquired generates more rental income. As your standard bank loans are paid off, those properties generate pure profit.
In principle, it is quite easy to utilize hard money to fund the property investments. A lot of successful investors do it. The key is understanding how hard money works and playing the game by its rules.