One could be forgiven for thinking hard money lending is a financial trap based solely on content found online. The fact is that a lot of people write unnecessarily bad things about hard money because they misunderstand it. If hard money were so bad, why would so many people use it? And more importantly, who actually utilizes hard money?
It’s Not for Consumers
Part of hard money’s bad reputation is due to people comparing it to consumer lending. So let us settle that. Hard money is not intended for consumers. Hard money lenders like Actium Lending, out of Salt Lake City, UT, do not lend for residential mortgages and car purchases. Hard money is not utilized to purchase boats, RVs, and vacation properties.
Comparing hard money to consumer lending is like comparing a high-powered Indy car with a luxury limousine. The two are entirely different vehicles that serve entirely different purposes. What little they have in common doesn’t do either one justice when comparing the two.
As Actium Lending explains, hard money is intended for commercial purposes. It funds commercial needs. By its very nature, it wouldn’t be well suited to consumer needs due to exceptionally short terms along with higher interest rates and lower LTVs.
Typical Hard Money Borrowers
Explaining all of that brings us back to the fundamental question of who actually utilizes hard money. The possibilities are endless, but let us deal with the three most common borrowers hard money lenders work with:
1. Property Investors
Property investors are easily the most common hard money borrowers, according to Actium. These are investors looking to acquire new properties to add to their portfolios. A classic example would be a property management company that owns a dozen office buildings.
The company wants to acquire a new office building in the local area. Actium Lending provides the initial funding that gets the borrower to closing on time. Later on, the company refinances the property and repays the hard money loan.
A fair number of property investors are also landlords. They buy up apartment complexes, residential rentals, and even vacation properties. It is all about building a portfolio that generates monthly income and simultaneously increases the investor’s ROI.
2. Property Flippers
The next most common hard money borrower is the property flipper. This is an investor who makes his money by purchasing residential or commercial properties, rehabbing them, and putting them back on the market.
A common strategy among property flippers is to focus on distressed properties they can get at a discounted price. They invest some money in rehab and then sell the properties at a profit. Incidentally, property flippers can flip just about anything – from warehouse space to office space to residential homes.
3. Established Businesses
A third type of hard money borrower is the established business looking to expand operations, acquire a competitor, or restructure his own debt. Companies seeking out hard money loans tend to have business assets they can offer as collateral.
A good example would be a local business looking to open a second location across town. They are purchasing property that will act as collateral on the loan. The owner is fairly confident that 12 months of business at the new location will provide the necessary revenue to repay what was borrowed.
There are plenty of needs for which hard money is appropriate. They all have one thing in common: they are needs that banks don’t want to touch. That does not make hard money a bad thing. In fact, hard money meets a very real need that wouldn’t be met otherwise.