Property Acquisition: The True Cost of Waiting for a Conventional Loan

Relying on a conventional loan to acquire a piece of investment property requires waiting. Conventional loans can take 30-45 days, or longer, to arrange. But waiting is costly. In a highly competitive real estate market, waiting is something investors usually cannot afford.

The true cost of waiting eclipses the higher interest rates normally associated with hard money loans. Investors also need to consider capital costs and opportunity capture. When all is said and done, a hard money loan could actually be more productive despite its higher interest rates and points.

Speed vs. Money Numbers

It is easy to look at hard money and avoid it because of its higher interest rates and points. But wise investors do not focus exclusively on money numbers. They look at other factors. The wisest among them are very interested in hard money’s speed.

Actium Lending, a hard money lender active in Colorado and several other states, explains that speed is the most attractive characteristic of the hard money industry. Hard money lenders can usually get to closing in 3 to 7 days. In a highly competitive real estate market, working that quickly is a big deal.

The 30-45 day wait associated with conventional lending is a deal killer. Is it worth taking the risk of losing out on potentially lucrative deals just to save a few percentage points? Probably not.

Hard money is a short-term proposition. So a slightly higher interest rate for 6-12 months is a reasonable price to pay for access to the best deals.

Lost Opportunities Are the Reality

Waiting for conventional loans equals lost opportunities in real estate investing. Here’s why: lucrative commercial properties almost always go to the investor capable of combining the right purchase price with a short closing. Sellers want to get deals done. They aren’t big fans of waiting on traditional lenders. They are also very wary of financing contingencies.

Actium Lending insists that hard money offers the same advantages as a cash-only deal. Investors with hard money behind them can effectively compete with all-cash buyers nearly every time. And in some cases, hard money has an advantage because assets don’t have to be liquidated to come up with the cash.

On the other hand, the price of hesitation can be steep. Consider the following:

• Competitive Properties – Competitive properties don’t stay on the market long. If an investor cannot get to closing for 30-45 days, there is a good chance another investor will come in and steal the deal.

• Non-competitive Properties – Even with non-competitive properties, there is the risk of increased valuation. The price of a property could go up while an investor is busy trying to arrange financing. A significant increase could scuttle the deal altogether.

Lost opportunities are a reality when property investors rely exclusively on traditional lenders to finance their acquisitions. On the other hand, hard money opens the doors to opportunities that would otherwise remain out of reach. Higher interest rates and fees are a small price to pay for access to lucrative properties.

Carrying Costs Matter Too

Finally, carrying costs also matter to the equation. These are things like taxes, insurance, utilities, etc. Carrying costs are immediate with hard money financing. But the upside is that the new property can immediately start generating income or, if it’s not a rental, appreciating in value. Both propositions cover carrying costs.

No matter how you slice it, the true cost of waiting on conventional financing doesn’t justify avoiding hard money. In so many cases, hard money is the best way for an investor to acquire a new property in a highly competitive market.