Does Hard Money Make Sense for Buying Multi-Family Properties?

Here at Actium Partners, we have plenty of opportunities to work with real estate investors looking to obtain new properties. Some of those investors are looking at multi-family properties, like apartment buildings. The question is this: does hard money makes sense for buying these properties?

Multi-family properties come in all shapes and sizes. There are apartment buildings with 4-8 units each. There are large homes originally built as single-family dwellings but then subdivided into smaller apartments. There are even commercial buildings that have been transformed into residential space with a combination of standard apartments and lofts.

From the real estate lender’s perspective, it is all about whether the value of the property justifies the amount being borrowed. It is really not our position to tell a borrower whether we think an investment is a smart one. Needless to say, there are pros and cons to investing in multi-family properties. Each investor has to consider these for themself.

Higher Profit Potential

It has been suggested by more than one real estate expert that multi-family properties generally offer a higher profit potential. The best way to think of it is in terms of scale. If you are buying a property with a total of 10,000 square feet of space, you are likely to collect more rent from twenty studios at five hundred square foot each, as opposed to ten apartments at a thousand square feet.

Likewise, a large single-family home subdivided into three smaller apartments is likely to fetch more money than renting the entire house to a single family. As for whether hard money would be the best way to finance the investment, it really depends on what you are looking to accomplish.

Hard Money and a Bank Loan

There are instances in which a bank would be more than willing to lend if the rent on a multi-family unit could support the investor’s position. But perhaps the bank will not lend up front. They want to see the property perform first. Getting a hard money loan could allow an investor to purchase the property. Then, with a few months of established rental payments in support, the investor could apply for a traditional bank loan.

Hard money makes perfect sense in this type of scenario. In fact, these types of loans are pretty common in our industry. Private lenders offer short-term hard money loans with the expectation that the investor will eventually arrange other financing. That financing represents the investor’s exit strategy.

Improving a Multi-Family Property

Are their situations in which a hard money loan is not the right choice for acquiring a multi-family property? Absolutely. For instance, you might have a property that needs an extensive amount of rehab before units can be rented. Because hard money lenders typically do not get involved in construction loans, there might not be enough value in the property to cover a hard money loan.

Hard money lenders are generally reluctant to get involved in projects for which collateral is not strong. Unless the investor could offer another piece of property in support of a loan, it would be hard for the lender to take on a project requiring extensive rehab.

Real estate investors utilize hard money loans for all sorts of projects, including investing in multi-family properties. But as with most things in our industry, there are no hard and fast rules. That is what makes hard money lending so unique. We are able to look at each project on its own merits and make individual decisions from there. Sometimes hard money is perfect for multi-family properties, other times it is not.