4 Creative Ways Real Estate Investors Profit From Hard Money

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Although a simple Fix & Flip is typically the most common use for a Hard Money Loan, there are several other profitable techniques for Real Estate Investors to utilize. Expand your portfolio by employing a variety of these applications in your own life, and experience the different and innovative ways to build your wealth!

Table Of Contents

#1: Cash Out Refinancing

Cash Out Refinancing Loans can be a useful option for those investors that seek to liquidate equity from either their portfolio or on a single property. A mortgage refinance happens when homeowners get a new loan to replace their current mortgage, in order to lower the interest rate. A cash-out refinance happens when borrowers refinance for more than the owed amount. The borrower takes the difference in cash. Also called a cash-out refi.

Homeowners today can treat their houses like piggy banks, easily turning their equity into cash and credit. You have home equity loans (also called second mortgages at times), home equity lines of credit and reverse mortgages. Then there’s cash-out refinancing.

Cash-out refinancing explained:

When using cash-out refinancing, essentially a homeowner will refinance their mortgage for more than they currently owe, then they are able to pocket the difference.

Here’s an example: Let’s say you still owe $80,000 on a $150,000 house, but you’d like a lower interest rate. You also want $20,000 cash, perhaps for your child’s first semester at Princeton, or that second honeymoon you’ve been dreaming of. You can refinance the mortgage for $100,000. Ideally, you get a better rate on the $80,000 that you owe on the house on top of receiving a check for $20,000 to spend as you see fit.

Cash-out refinancing differs from a traditional home equity loan in a few key ways:

  • A home equity loan is a separate loan on top of your first mortgage.
  • A cash-out refinance is a replacement of your first mortgage.
  • The interest rates on a cash-out refinancing are usually, but not always, lower than the interest rate on a home equity loan.

#2: Bridge Loans

First, let’s define a bridge loan. In essence, bridge loans are designed as provisional funding for an individual or business until a permanent funding source can be acquired. Subsequently, the monies used for permanent funding, can sometimes be referred to as a “take out” loan, referring to the fact that it pays back the bridge loan.

Although bridge loans will be more expensive in all respects, from up front points, to origination costs and the interest rate; it is usually the better choice for investors who wish to close quickly with less red tape than traditional bank criteria. The term is usually less than a year, and the bridge loan lender will want to see either that you have a plan to put the next stage, or permanent funding in place.

#3: Rehab/Renovation Loans

One of the more frequent uses of Hard Money Capital Funding is to quickly close on a real estate purchase. Essentially, a borrower can locate a property that doesn’t need major renovations, and use the loan to improve it. Ideally, with a renter already in place, this way they can then refinance the loan with a commercial lender.

Example of a Rehab Loan

As an example, an investor may see a commercial building they want to purchase that has had poor management and is in fair condition. Most likely, a bank will not initially lend on this type of property. At this point, the investor would get a Private Hard Money loan to buy, renovate and lease-up the property. Once the property has become stable, the investor can turn to a bank or alternate financing source to take out the Hard Money loan and replace it with permanent funding.

#4: Apartment Building Loans

Apartment buildings are one of the most predictable real estate assets in the market, and with the right team can generate some of the most dependable long-term returns. There will always be value in apartment buildings. Reliability can be a fickle beast in the Real Estate Industry, and apartment buildings can be the anecdote for several reasons, as I will explain.

Handsome Return of Investment

Even those relatively modest and low-yielding apartment buildings can offer handsome returns relative to other asset classes. Many investors find the cash-flow appealing, which, depending on how you purchase your apartment, can range anywhere from a few percent to the mid-teens per year, calculated relative to your down payment. Additionally, you’re paying your loan down, and this adds to the return you’ll see come into fruition either when you finally sell the property and pull out your accrued equity or when you finish paying off your loan and get an instant increase in monthly income. Although reduction of principal may not seem like a large contributor to your return, remember that your mortgage increases its impact, since the growth is in direct relation to your down payment.

Operational Simplicity

In comparison to other types of real estate investments, apartments are considered relatively easy to operate. Your responsibilities are defined clearly, and your relationships with tenants are quite straightforward. The difference is significant from leased investments such as offices and retail centers where acquiring tenants can be costly and labor-intensive, not to mention the nature of each tenancy can differ greatly.

Tax Benefits

Similar to other forms of investment real estate, you can write off all of your expenses with basically no limit to minimize your taxable income. If you then use the profits from the sale of your apartment to fund additional investment real estate, you can also defer your capital gains and recapture taxes. Plus you can depreciate your apartment while writing off a portion of its value every year, reducing your tax liability even further. Disproportionate to traditional commercial real estate that has a 39-year life, apartments get depreciated over 27.5 years, providing a greater yearly write-off than with most other kinds of properties.


Conclusion: In a nutshell…

Going the Fix & Flip route is traditionally the way investors begin their adventure in building wealth, and with good reason. There is a veritable cornucopia of information available on the pro’s and con’s of Fix & Flip investments, I myself have described this very topic, at length, several times so I’ll spare you the details until a later time… Either way, the most savvy investors with more intestinal fortitude know that there are several creative and unorthodox options available to those willing to put forth the effort necessary to achieve financial freedom.

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