Cash vs. Hard Money
Depending on your school of thought and the resources you have available either cash, or hard money financing can be a good option. If you have a minimum of $100,000 or more in cash you can purchase an investment property outright, remodel the property, and either sell it or rent it out without incurring the costs associated with carrying a loan, and that means more profit in your pocket. Although the other school of investors do not want to risk all or most of their capital on one transaction and understand that real estate is an illiquid investment. If you are planning on renting the property out and would like to perform a cash-out refinance to recoup your cash invested to buy a second rental property, this can prove difficult in today’s market and can lead to a dead end investment strategy.
Investors that believe in the effectiveness of leverage tend to favor using hard money loans. This type of lending is quick, doesn’t carry any of the limiting factors that prevent bank or conventional loans from being successful, and comes with construction funds needed to transform a distressed asset into a performing one. When an investor is ready to refinance out of a hard money loan, it’s considered similar to a rate-in-term refinance and not a cash-out, which is infinitely more available. With a hard money loan, the investor only needs to risk the illiquidity of a fraction of the cash that would be required for an all-cash transaction, $15,000-25,000, and can usually receive close to a 100% return on that cash when the property sells or in the way of additional equity if it is held as a rental property. Some investors don’t see the wisdom in buying a single property with all of their cash to make $25,000 when they can utilize leverage to buy 3 properties that will provide $20,000 each while greatly diversifying their investments and improving their chances of success.
It’s always a good idea to have a source of financing lined up prior to beginning your search for real estate. A simple pre-approval process can take as little as 24 hours and is a great way to establish what your buying capacity truly is.