Four Investment Property Types to Buy With Hard Money
If you’re looking for a way to get into real estate investing, hard money loans may be a good option for you to fund your purchases. With hard money loans, you can purchase all different types of investment properties. In this article, I will go over the main investment property types that we commonly lend on. These include multi family properties, commercial buildings, fix and flips, and Single Tenant BRRRR properties. Each investment property type has its own unique benefits and risks. In this article, we’ll take a closer look at each one.
Multi Family Properties
Any structure that has multiple, individual dwelling units, is known as a multi-family property. Examples of a multi family investment property include a duplex or an apartment complex, just to name a few.
Duplexes, threeplexes, and fourplexes are different types of multi family properties with a smaller number of units for investors who want to get their feet wet in multi family. These properties usually have two, three, or four units, respectively, so only a small number of units to manage and maintain.
When you get a hard money, private money loan to purchase multi family properties, lenders will often require a slightly larger down payment than on a residential, single unit purchase.
Apartment complexes are a subtype of multi family property with a larger number of units, usually 5 or more units. Although more units translates to more rental income, apartment complexes require more repairs and maintenance, and thus often demand that their owners have more cash reserves.
Multi Family properties are located in both rural and urban areas and can provide a steady stream of income for a real estate investor (if purchased at the right price and managed properly). One of the benefits of investing in multi family property, is that you can get multiple rents coming in from different units. If one of the tenants does not pay rent, or if there is a vacancy, you may still have rental income from the other tenant(s). This lowers your risk as compared with renting a single unit property.
Some hard money lenders prefer multi family property loans over single tenant property loans because multiple units means more tenants paying rent if there is a vacancy, or if one of the tenants doesn’t pay rent. When lending to buyers of multi family properties, hard money lenders usually want to make sure their borrowers have prior experience owning rental real estate.
This is because rental real estate tends to come with more ownership headaches, and particularly with a multi family property with a larger number of units. Also with multi family you need cash reserves for maintenance because multiple units means multiple repairs and improvements that may be necessary after purchase.
A hard money lender may be expecting you to bring in a larger down payment and show more cash reserves for the purchase of a multi family property than in the purchase of a single unit dwelling. Also, if you plan to manage the property yourself you will need to plan on spending time collecting rents and doing groundskeeping. This is one of the reasons that some hard money lenders may want to see experience, to know that you have a plan for how these things will be managed.
Commercial buildings can be a great investment for those looking for stable returns with longer term leases. There are many different types of commercial buildings, the most common include:
- Retail buildings
- Industrial buildings
- Office buildings
- Apartment Complexes
One of the main benefits of commercial buildings is that they have historically provided a good hedge for inflation and a reliable income stream, often with higher yields than residential real estate. Urban, retail buildings often lease to niche tenants with established businesses in prime locations. Leases with these kinds of tenants are usually longer term and more likely to renew.
Some building types perform better than others in certain locations, and this is usually based on supply and demand in the area. Another risk associated with commercial buildings is that they can be hard to sell quickly, or can be trickier to finance, particularly single tenant commercial buildings.
Fix and Flip Properties
A fix and flip is a type of investment property where the investor purchases a property, makes repairs or renovations and then sells it for a profit. This can be a great way to make money in the real estate market, but it does come with some risks.
Some of these risks are
- Increased competition in your resale price range
- Being underfunded in the deal, e.g. having less money than is needed to complete the remodel, not being able to make payments on the loan used to purchase the property, etc.
- The remodel takes longer than expected or the property takes longer to sell than expected. Either way the project takes way longer than expected.
There are many hard money, private money lenders that lend on fix and flip properties. Loans for fix and flips are often called “rehab loans.” Some lenders will provide money for repairs but the borrowers are always expected to bring in some of their own cash.
There is a lot of competition for fix and flip properties, for this reason, you need to be able to close quickly when the right deal comes along. Get preapproved with a private lender prior to looking for properties. Here are 6 things that you’ll need to provide to a hard money lender to close on a property quickly.
BRRRR is an initialism that means “buy, rehab, rent, refinance, repeat.” This type of investment is similar to a fix and flip investment property, but instead of selling the property after making repairs or renovations, the investor keeps the property and rents it out.
BRRRR properties most commonly are single unit properties such as a single family home or a townhome. Rental properties can provide a steady income stream and may appreciate over time. Many private money, hard money lenders will approve this type of property for purchase based on the asset characteristics with no minimum credit score, no experience, etc.
If you purchase a BRRRR property using a private money, hard money loan, make sure you’re covered on the “refinance” part of the BRRRR, e.g. make sure you qualify for 30 year mortgage to pay off the private money used for the acquisition of the property. Read more on how to purchase BRRRR properties using private money loans
This article has focused on 4 types of investment properties that you can purchase using private money loans. But there are so many other investment property types that real estate investors purchase using private money, hard money loans including raw land, residential development, new construction, to name a few.
Purchasing an investment property does require upfront research, due diligence, and an understanding of the real estate market in the area where the property is located. You will need some cash reserves to cover ongoing repairs and maintenance. And if you pay too much for a property, you may not be able to cash flow the property, or worse you could be losing money. Never bet on future appreciation of any property as your reason to buy, but instead focus on the present and future cash flow.
Hard money loans are a great option for investors who want to purchase an investment property but don’t have traditional financing available, have poor credit or no credit, or need to close on a property quickly. If you would like to get preapproved to purchase an investment property, reach out to us today.