It is understood within the hard money industry that most loans go toward obtaining new properties. But most does not mean all. There are other uses for hard money and bridge loans. For example, a property owner might turn to hard money to turn existing real estate into a liquid asset.
Real estate has inherent value even when it is saddled with an existing mortgage. As the mortgage is paid down and eventually paid off, value increases. How does an owner unlock that value? One way is to sell the property. Another is to borrow against the property by way of either traditional lending or a hard money loan.
Going the hard money route essentially transforms the property into a liquid asset. A real-world example from Salt Lake City-based Actium Partners illustrates the point well enough.
A Need for Significant Cash
Actium’s client was the owner of a retail building. He needed significant cash to expand his business and fund future growth. This client could have gone to a traditional lender to arrange a small business loan. Instead, he went to Actium for a hard money loan. In his application, he offered the retail building as collateral.
Actium did its normal due diligence before approving the loan. It did not take long. In short order, the client had the funding he needed to move his plans forward. When he no longer needed the funding, he repaid the loan without any early repayment penalty.
The deal probably wouldn’t have been possible through a traditional lender. Why? Because one of the business owners’ needs was paying off existing debt. Traditional lenders tend to be reluctant about such things. Hard money lenders, not so much.
More Value Equals More Cash
Though I don’t know all of the details behind the scenario I just described, I do know that more value in a given property equals more cash available through a hard money loan. Let’s say the business owner still had an outstanding mortgage on the property. The combination of that amount and the lender’s loan-to-value (LTV) ratio would have limited the amount of money available for lending. But what if the client owned the property free and clear? What if there were no outstanding mortgage?
At that point, the full value of the property can be leveraged for cash. The owner has 100% of the value to work with. Owning his property free and clear would create the ideal scenario for maximum liquidity.
I am also not clear on how Actium’s client repaid his hard money loan. Perhaps business growth generated enough revenue to cover repayment. Perhaps he had other assets to sell. Regardless, he was able to turn a property he already owned into a liquid asset and use that cash to fund his company’s growth.
The Advantage Is of Hard Money
All of this begs the question of why this client would choose hard money over traditional lending. It’s due to the advantages hard money offers. At the top of the list is speed. Firms like Actium Partners can work much more quickly than traditional lenders. Hard money lenders also offer a more streamlined underwriting process that includes minimal documentation requirements and no hard-and-fast income verification.
Hard money made it possible for this particular business owner to turn a piece of real estate into a liquid asset. Others like him have reaped the same benefits from hard money. Knowing what I know about the hard money industry, I am not surprised that so many investors and business owners rely on it as heavily as they do.