It’s hard to find an investor in any niche who doesn’t understand how difficult traditional business loans can be to access if you haven’t built a long operating history or a well-cemented credit rating. At the same time, though, there are obviously thousands of companies who get off the ground every year, and even more independent entrepreneurs and investors who manage to make their fortunes and build their businesses. That’s where alternative sources of financing become important, and understanding when to use them and which ones bring the most advantages can even be the make or break factor in your success as you invest in commercial real estate. If you don’t have a lot of reserve cash or the kind of operation banks typically provide long-term business loans to, hard money loans might just be your best way into real estate investment.
Hard money loans are different from commercial loans in both the way they are structured and the places they come from. Instead of securing the loan with the asset being purchased, hard money lending uses collateral from elsewhere in your portfolio. That means if you’re holding long-term income properties, they can finance your next purchase. For investors with a few rentals who want to make some extra money flipping properties, this is a hugely important tool, because hard money lending is calculated from the value of the collateral and your annual business income. That means your credit rating is not as important if it’s even in consideration. Since they aren’t tied to an asset purchase, they can also be used as bridge loans when you need to raise capital for renovations and other operational costs, not just when you’re purchasing commercial real estate.
The key is understanding your repayment structure and your options. Some hard money loans amortize across the loan, even if it is only for six months to a year. Others allow you to pay interest-only payments, with a final payoff when the loan term expires. If you are purchasing an income property that’s nearly turnkey-ready, amortizing payments can get you into the property so you can fill it and get to making money. On the other hand, for flipping, minimal payments followed by a full payoff after the sale of the property can be a very cost-efficient model. It really just depends on what your goals for the loan are, as well as what the lender offers for payment structures. The best part? Unlike unsecured debt, hard money loans for commercial real estate enjoy lower risk and lower interest rates you’d expect from secured debt.