Hard Knock Life: Hard Money vs. Asset-based Lending

Contributing Writer, B2R Finance | Financing

By Kerry Curry, Contributing Writer

If you’ve ever watched HGTV’s popular “Flip or Flop” show starring Tarek and Christina El Moussa, you know the couple mainly relies on hard money loans to buy and renovate distressed residential property with the goal of quickly flipping the property for a tidy profit.

Occasionally, the couple’s timeline and renovation budget go haywire. They may start with a timeline of 30 days and then discover lead paint, asbestos or an unpermitted addition has busted the budget and their timeline. These surprises also put the squeeze on their profit margin.

In the wings is the couple’s hard money loan and unbudgeted interest charges that accrue as the work drags on for far longer than expected. Other flips are wildly successful, making the couple’s gamble with a high-interest rate hard money loan pay off with a hefty profit.

What is a hard money loan and how is it used?

In this blog post, we’ll look at the differences between hard money lending and cash-flow based lending — two types of asset-based loans popular with residential real estate investors.

First, let’s talk about hard money loans. These are asset-based loans that come with a higher interest rate and shorter term than a typical mortgage.

Often, hard money loans are used to purchase and rehabilitate residences that have been through foreclosure or are distressed in some other way. The owners may be behind on mortgage payments and seeking a short sale, for example, or the property may have already been taken back by the lender.

Distressed properties typically pose a greater risk to a lender than an owner-occupied home because of their condition. Such properties typically are sold “as-is” and may have suffered from months or years of deferred maintenance.

While hard money loans can be used for projects that last months or years, investors likely are most familiar with their use in the fix-and-flip world. You get a hard money loan, you buy a house and fix it as quickly as possible. Once the property is flipped, you collect your profit, pay off the loan and move on to the next flip.

What is asset-based lending based on cash flow?

Real estate investors who follow a strategy of buy-and-hold may have tapped a variety of sources to fund their residential rental portfolio: cash, private funding, traditional mortgages and asset-based loans.

The asset-based lending done by B2R Finance is based primarily on the cash flow of an investor’s property, not on the investor’s personal income.

An asset-based lender will perform a cash flow analysis to determine the loan proceeds available to a qualified investor. The lender will verify the property’s rent and make a determination as to whether the market supports the current rent. Other information such as the investor’s credit score and financial stability will be considered. The loan-to-value on an asset-based loan can be as high as 75%.

Which investment vehicle is best?

Hard money loans and cash-flow-based lending are two asset-based funding options for entrepreneurs who invest in residential real estate.

While hard money loans have been around a long time in residential real estate, the wider use of cash-flow lending in the residential sector is much more recent, becoming more common in just the last five to six years.

The good news for investors is that more financing options than ever are available. Investors should carefully weigh their real estate investment goals in order to choose the option that makes the most sense for their investment strategy.

B2R Finance offers rental investors innovative lending products to help unlock equity from existing portfolios and provide the cash needed to build rental portfolios nationwide. For more information about how B2R can help you obtain rental property financing, just call 800-227-8107 or visit http://www.b2rfinance.com/apply-now and follow us on Twitter @B2RFinance.

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