Should Nervous Real Estate Investors Turn to Hard Money?

Real estate investors are known to utilize hard money to fund new investments. But a recent article published by the Orange County Register puts an interesting twist on things. It proposes that nervous real estate investors who are not sure about putting their money into new properties consider investing with a hard money lender instead.

As the thinking goes, the real estate market is shaky right now. If the country’s economic problems continue unabated for some time, the market could fall drastically. Properties acquired within the next 6-12 months could be worth a lot less two or three years from now. On the other hand, investing in hard money offers the potential of a stable return regardless of which way the economy goes.

Hard Money Is Private Money

If you are not sure how any of this works, start with the premise that hard money is private money. Hard money lenders are not banks. They are lenders licensed by their respective states, according to Salt Lake City’s Actium Partners. But the money they choose to lend out comes from individual investors who contribute their resources to the Actium fund.

Hard money lenders are free to set their own rates and terms. They are free to come up with their own underwriting processes. Finally, they are free to accept funding from a number of different investors.

One of the things that makes hard money so stable as an investment is the rate of return. According to the Orange County Register post, a 10% return is about average. The post points out that real estate investors can get as much as 25% on rentals and flips, but that’s under current market conditions. If the market collapses, so do those returns.

Careful About Lending Projects

Investors should dig deep into the kinds of projects a hard money lender funds before deciding to invest. Actium Partners says that most lenders are very choosy about their projects. They need to be. If a lender wants to guarantee a rate of return that will keep investors happy, they need to lend wisely.

Perhaps that’s why hard money lenders follow the asset-based lending model. Under this model, borrowers are expected to put up some sort of collateral to secure their loans. A typical real estate transaction would utilize the property being acquired as the collateral. It needs to have enough value to make the lender happy. There also needs to be a certain amount of built-in equity accomplished through the borrower’s down payment.

Asset-based lending protects investors by way of an asset that can be seized and sold in the event of default. This hard asset mitigates any potential losses investors might face on a bad loan. As such, hard money and bridge loans for real estate tend to be a very stable investment.

A Good Alternative for Now

The real estate market has shown some signs of weakness over the last two or three quarters. Some are even saying we are on the verge of another market collapse similar to what we saw in 2008. If that is the case, hard money is a good alternative to acquiring new properties. Hard money will always be in demand regardless of what the property market does. As such, there is some stability there.

Should nervous real estate investors turn to hard money right now? It is something to think about. Becoming a hard money investor means putting that cash to work in a more stable scenario. On the other hand, letting it sit in hopes that a market crash produces bargain basement prices is another option.