Commercial real estate investors tend to travel down one of two paths when looking for acquisition funding. The first path takes the investor to a conventional lender in search of an institutional loan. The other path sends him to a hard money lender for an agile, asset-based loan. Separately, neither path is necessarily better or worse than the other.
Both types of lending have their advantages and disadvantages. The successful investor looks at financing as a tool. And as with any other job, there is a right tool for adding a new property to an investor’s portfolio. The investor must figure out which tool is the best choice for each acquisition.
Conventional Lending: Stable and Low Cost
Banks, credit unions, and even life insurance companies offer conventional commercial loans. They are considered the gold standard for projects involving stable assets. Here are some of the pros that real estate investors appreciate:
- Lower Interest Rates – Conventional lenders tend to offer lower interest rates than their private counterparts. They can come in at several percentage points below private lenders.
- Longer Terms – Conventional lenders also offer longer terms. Loans could range from 5 to 25 years, offering investors long-term predictability.
- Amortization – A conventional loan allows an investor to pay down the principal over time. Meanwhile, he is also building equity in the property.
Of course, there are cons as well. The biggest is underwriting. Because banks were heavily regulated, they must follow rigid underwriting rules that demand exhaustive documentation, a high credit score, and more.
Slow execution is another con. It can take a bank 90 days or longer to get from application to closing. Conventional loans are typically subject to conditions as well. Banks and credit unions avoid lending on any properties that are not already stable. They want properties with high occupancy and minimal renovation requirements.
Private Lending: Fast and Flexible
Hard money loans are a great alternative when circumstances warrant. Actium Lending, a Utah hard money lender based in Salt Lake City, explains that most hard money loans are made by specialized lending firms like theirs. Some are made by private individuals. Regardless, lenders focus on the value of the asset being purchased rather than the borrower’s credit performance. Here are the pros:
- Rapid Funding – The most attractive benefit of hard money is rapid funding. Loans can be closed in a matter of days rather than months.
- Asset-Based Approvals – Because hard money lending is asset-based, borrowers do not have to have stellar credit scores. Hard money lenders are able to overlook a lot as long as asset value is high enough.
- Ugly Funding – Conventional lenders typically will not finance vacant, damaged, distressed, or other ‘ugly’ properties. Hard money lenders will.
The biggest downside to hard money is the higher cost. Hard money loans come with higher interest rates and more origination points paid at closing. Terms are also considerably shorter at 6-24 months on average.
Hard money loans are typically structured as interest-only loans. This is a disadvantage to some borrowers who prefer amortization. Yet other investors love interest-only loans because their monthly payments are lower while they are working on stabilizing a newly acquired property.
Every Acquisition Is Different
Whether an investor is purchasing an office building in Salt Lake City or vacation rentals in Park City, every acquisition is different. Each deal requires looking carefully at all the financing options to figure out which path is the best to follow. Fortunately, Utah investors have access to both conventional and hard money lenders. Finding the right loan is simply a matter of looking around.