Bring up hard money as a topic of conversation on your next night out with friends and you will get a bunch of blank stares from across the table. Not a lot of people understand hard money loans simply because they have had no experience with them. So questions abound. For example, who applies for hard money loans and how is the money used?
Hard Money Is Private Lending
A good starting point for this discussion is laying out the basics of hard money. Hard money is essentially private lending conducted by individuals or small groups of investors who pool their money under a firm like Salt Lake City’s Actium Partners. Because hard money lenders are private lenders, they are not subject to the same federal regulations governing how banks do business.
Hard money lenders are regulated by the states in which they operate. Though there are some regulations in play, hard money is largely unregulated compared to conventional lending. This gives hard money lenders more latitude to work with clients. Together, they can put together customized loans that both parties are happy with.
Three Primary Uses
Actium Partners says that the vast majority of all hard money loans are designated for real estate transactions. Do not assume mortgages here. Rather, think about real estate investments. There are three primary uses for hard money in real estate:
1. Commercial Property Acquisitions
The first use for hard money in real estate is to fund commercial property acquisitions. This is Actium Partners’ specialty. It is their niche. They provide loans that allow investors to purchase things like warehouses, retail buildings, industrial buildings, and office complexes.
Investors purchase such commercial properties with the goal of being landlords. They rent out the space to cover their loans, expenses, and profit. Some years down the road, an investor might choose to sell a property secured by hard money.
2. Land Development
Land development is the next primary use of hard money in real estate. This is something Actium Partners does not get involved in. Nonetheless, other hard money lenders provide the funding investors need to purchase and develop land. A loan could be just to make improvements. But it could also involve a series of construction loans that help the developer get from purchase to sale.
3. Residential Fix-and-Flip
The third primary use of hard money in real estate is another niche that Actium Partners does not get involved in: residential fix-and-flip. Note that properties acquired under this model are still considered commercial properties because investors are buying, flipping, and selling them as a business venture.
Fix-and-flip is considered the most risky property investment strategy among many professionals. With the speed at which residential property prices change, house flippers need to have impeccable timing. They must also possess the skill and knowledge to choose the right houses, rehab them without spending a small fortune, and get them back on the market quickly enough to get their money back.
Other Potential Uses
Hard money lenders do offer financing for purposes other than the three I just described. Occasionally, Actium Partners will fund the expansion plans of a local business. Other hard money lenders write loans to help businesses restructure their debt. And of course, most of what goes on in the world of mergers and acquisitions (M&A) would not be possible without hard money.
Most borrowers apply for hard money to cover real estate investments. Hard money offers speed, easy approval, and a streamlined underwriting process that makes borrowing virtually hassle-free. No wonder real estate investors love it so much.