I remember when I first began looking into property investing. Like most people, I just assumed that wealthy investors plunked down cold, hard cash every time they acquired a new property. Imagine my surprise to learn that they don’t. Property investors are far more likely to finance acquisitions with hard money and bridge loans.
You might expect that new investors would rely on financing simply because they do not have enough cash on hand. But even uber wealthy investors with portfolios worth millions of dollars still go the financing route. I am about to tell you why. Truth be told, their reasons make an awful lot of sense when you stop and think about them.
Making Cash Go Further
For starters, Salt Lake City’s Actium Partners explains that private lenders still require down payments to obtain hard money and bridge loans. Down payments for investors can be as high as 50%. That is a lot. Now, consider an investor who has enough cash to purchase a single property straight up. He could divide the cash equally for down payments on two properties and finance the rest. Which option makes more sense?
By financing acquisitions, investors can stretch their cash further. They can put their cash into down payments alone, giving them the opportunity to acquire more properties as a result. More properties generate greater returns.
Financing Equals Leverage
Leverage is especially important in property investing. The more of it you have, the faster you can grow your portfolio. Financing acquisitions provides some of that leverage. How so? By giving investors access to properties that might otherwise be financially out of reach.
Hard money loans are approved based on property value rather than a borrower’s ability to repay. So, even though a bank may turn down a conventional loan due to a lack of confidence in the investor, a hard money lender would be more than happy to take on the project because the property has enough value to cover the cost of the loan. The investor now has access to a property his bank would not touch.
Leveraging Equity for Higher Returns
Even though the wealthiest investors eventually have enough cash to obtain new properties without loans, financing is still a good idea because it utilizes equity to generate higher returns. In other words, an investor can use the equity in an existing property to secure a hard money loan for a new property.
Where cash equals profits, equity equals an available resource. That resource can be put into obtaining new properties by combining it with hard money financing. An investor generates more returns while spending less cash.
In the real world, this works out pretty simply: one property supports the acquisition of another, and another, and so on. It’s how investors turn a small portfolio into a money-making machine.
Preserving Cash Flow
Finally, investors do need to maintain a certain level of cash flow to pay their expenses. For example, every new acquisition involves attorney’s fees, appraisals, insurance premiums, and so forth. Investors also have repair and maintenance costs to think about. It doesn’t make sense to tie up large amounts of cash in acquisitions when cash is so valuable to keeping the business side of things operating day-to-day.
The most profitable property investors know enough to not spend cash on acquisitions. They know that it is far better to finance acquisitions while preserving cash for other things. Even though wealthy investors could pay cash for new properties, they prefer not to. Fortunately, they have hard money and bridge loans to help them complete their acquisitions.
