Imagine owning a portfolio of hundreds of residential rental properties all managed by a professional management company. Each property generates a monthly income for you. Even after paying the management company and your other costs, you are earning a tidy living simply by owning homes.
Are you intrigued? If so, you should know that just about anyone with the wherewithal and willingness to put in the effort can build a real estate empire. You need some knowledge, a bit of skill, lots of sound advice, and funding. For many a real estate investor, hard money is the best funding choice.
The Definition of Hard Money
Hard money is so designated because it is money loaned against hard assets. According to Actium Partners, hard money lenders in Utah typically approach real estate investors by looking at the very properties those investors hope to purchase. They might consider other properties as circumstances dictate.
Let’s say you find a property listed at half its retail market value thanks to extensive rehab needs. Your plan is to use a hard money loan to cover both the purchase and renovations. The lender will look at the amount you want to borrow as compared to the likely value of the renovated property. The lender will also look at how likely the property is to sell should it become necessary.
Your proposed property will act as collateral against any loan you receive. In essence, the property is a hard asset that the lender can repossess and sell should you default. As such, loan approval will rest in the anticipated value of the property post-renovation along with its probability of sale.
Hard Money as Seed Funding
One way to use hard money to invest in real estate is to use it as seed money. In other words, you may not have enough cash on hand to get started as a real estate investor. The best you can do is come up with a reasonable down payment on your first property. A hard money loan can make up the difference.
Your typical real estate investor has to acquire quite a few properties before generating enough cash to cover subsequent purchases without the need for loans. Again, hard money lending fits the bill. Hard money becomes seed money in the sense that the investor takes out loans to cover the first few properties in his portfolio.
Every satisfied loan gives the investor more financial leverage to purchase additional properties. As such, one loan begets another until the investor’s portfolio is generating enough income to purchase subsequent properties with cash.
Hard Money as Ongoing Funding
Using hard money as seed money is just one way of going about it. Some investors choose to rely on hard money as an ongoing funding tool. Why do this? So that cash is not tied up in single purchases and renovations. With hard money in play, the same amount of cash can be used to make multiple down payments on multiple properties. Thus, the laws of scalability allow investors to purchase more properties as time goes on.
Others use hard money as an ongoing funding source simply because they want to put generated cash into their own pockets as profit. That’s fine, too. Just so long as the investor pays his loans and covers all of his costs, what he does with excess cash is his business.
The beauty of real estate investing is that it is scalable and self-perpetuating. Seeding a real estate investment strategy with hard money is just one way to go about it.