Hard money lending is a type of financing that is based almost entirely on collateral. That is where the name comes from. Approvals are based on the value of some sort of hard asset that a borrower offers as backing. Technically, hard money can fund virtually any financing need. But practically speaking, lenders tend to limit the projects they fund.
So, what types of project can hard money loans fund? The answer differs from one lender to the next. According to hard money lenders Actium Partners in Salt Lake City, Utah, some lenders take a very broad approach to their funding strategies. Other lenders prefer a more narrow approach.
Below are some of the projects hard money lenders are known to fund. Keep in mind that a given lender may or may not fund any of them.
1. Apartment Building Acquisition
While it is virtually unheard of for hard money lenders to fund single-family homes used as primary residences, some lenders do fund the acquisition of certain types of rental properties. Among them are commercial apartment buildings. These are typically buildings with at least four units in them. They can have hundreds or thousands of units if they are big enough.
Commercial apartment buildings are attractive to hard money lenders because they generate solid revenue and tend to have strong resale value. As long as a property is in good condition, lenders are usually more than willing to fund acquisition.
2. Commercial Land Development
Land developers looking to buy vacant land on which they can build commercial structures often turn to hard money lenders to get the ball rolling. Even if a lender will not fund construction costs, they will typically fund land acquisition and improvement. That allows a developer to buy a piece of land and run electric and sewer service. Then it’s off to the bank to fund construction.
3. Commercial Office Space
Another popular target for hard money lenders is commercial office space. Office properties tend to have an attractive resale value as long as tenancy rates are high. However, this may be changing as companies transition away from office work in favor of remote work. It will not be surprising to see hard money lenders begin pulling back from commercial office space projects.
4. Business Expansion
Some hard money lenders with a narrower focus prefer to put their money into business expansion projects. They help existing businesses grow their operations. For example, you might have a lender that approves funding for a business to open a second location across town. The borrower uses either existing business assets or the new location’s property as collateral.
5. Debt Restructuring
Businesses may turn to hard money lenders when they need to restructure their debts. For example, a business may run into trouble extending an existing loan with a current lender. Hard money can provide the funding to pay off the existing credit while the business looks for a new source moving forward.
6. Fix and Flip Investing
Fix and flip investing represents yet another opportunity for hard money lenders with a more narrow focus. A lot of lenders will not touch this sort of thing due to its inherent risks, but there are other lenders who do nothing but fix and flip. It is really a personal preference thing.
There are no black-and-white rules dictating what hard money can be used for. But lenders do have their practical limits. They choose the projects they want to fund based on risk, potential ROI, and other factors. Needless to say, hard money tends to be a lot more flexible than traditional financing.
