Doing some research into hard money loans led me to an Investopedia article on the topic. One of the questions posted in the article was whether or not hard money loans are good investments. I admit, I had never thought about hard money from that perspective before. But there are apparently others who do.
So what’s the answer? It depends on your perspective. Hard money loans are an investment for lenders. They lend out their money in hopes of getting a generous return. Borrowers may or may not consider the loans an investment. I guess it depends on how a borrower views things.
From the Lender’s Perspective
A hard money lender is a private lender rather than a bank, credit union, or financial services company. Some are individual lenders with enough of their own wealth to lend it out. Other lenders are actual firms licensed by their states to provide hard money and bridge loans. Their funding comes from multiple investors willing to pool their money.
Regardless of structure, hard money lenders are investors. They are putting their own money into various projects with the expectation of turning a profit. They put their money to work by lending it out to individuals and organizations willing to pay interest in return for the privilege of lending.
Actium Partners is a good example. The Salt Lake City-based hard money firm writes hard money and bridge loans in Utah, Colorado, and Utah. The vast majority of their loans go to real estate investors. But for Actium, the loans themselves are investments.
From the Borrower’s Perspective
Actium specializes in loans for real estate investors. An investor might consider the loan he takes out as an extension of the property investment. And if that is the case, he might consider each of his loans a good investment in and of itself. A loan becomes an investment inasmuch as it is the vehicle for acquiring a new piece of property.
A smaller percentage of hard money loans are made to businesses looking to expand, invest in new equipment, or improve their existing properties. These would all be considered capital investments. So I suppose a business owner borrowing hard money for such a purpose would consider the loan an investment as well.
Are there any situations in which a hard money loan would not be considered an investment? I can think of only one possibility: restructuring debt.
New Credit to Cover Old
Though debt restructuring does not make up a large percentage of the hard money in the U.S., some hard money loans are designated for that purpose. You might have a company whose current line of credit is reaching its maturity date. The lender does not want to extend credit any further, so the company needs to make good on what it owes.
That company may be short on time, so rather than going directly to conventional lenders, management seeks a hard money loan. Hard money can settle the original debt and buy the company 6-24 months to establish a new line of credit with a conventional lender.
In such a case, hard money is not an investment. It is more of a lifeline than anything else. A hard money loan essentially acts as a bridge loan to get the company from one source of funding to the next.
If you do not think of hard money as an investment, no worries. You are not alone. I had never considered its investment potential until I read the Investopedia article. Now I have a new perspective to add to my body of knowledge.