As a hard money lender in Los Angeles, I remain surprised at the stigma that a privately funded loan carries within the realm of real estate investing. It is my hope to fully explain the application of an asset-based loan for investors to expand their portfolio and to guide new investors in creating a solid foundation.
The Basics
Hard money loans are funded by private investors and, like you, these private investors have an entrepreneurial spirit. Private loans are not federally regulated or insured, and this is the reason for flexibility in the loan terms. The measurement of risk is evaluated for each proposed transaction.
The loan terms will be established when the objectives of the real estate investor can be compared to those of the loan investors. Like investors in real estate, the risk tolerances of loan investors are different for each deal.
As a hard money lender, it is my function to match the transaction proposed by a potential borrower with the investment criteria of the loan investment group. I enjoy applying the viewpoints of an entrepreneur to both sides of a loan.
The Application Process
The most favorable application of a hard money loan by a real estate investor is for the creation of value. Value is created by renovation to increase cash flow or by acquiring additional income-producing units. The proceeds from a hard money loan be used to acquire and improve an under-performing asset. Then, the real estate investor will need to focus upon and exercise the objectives pertinent to the hold period.
The highest value of a revenue-generating property is the point of stabilization. At this point, the real estate investor should sell the improved asset or refinance the hard money loan with a traditional, federally insured loan. The traditional loan will recognize the value at stabilization and will offer a more favorable cost of capital through the hold period. The lower cost of capital will increase the cash flow.
Hard money loans are not structured for long-term holds. The carrying costs of the loan are higher because the loan investors recognize the potential of value. The absence of actual value increases risk. The cost of capital built into a hard money loan is commensurate with the measurement of risk.
Generally, a traditional lender will not lend on a value-add transaction or upon an under-performing asset. The loan terms are predicated upon stability of the cash flow generated from the operations and the strength of the borrower.
An understanding of the best application of a hard money loan will enable the real estate investor to expand or build the portfolio.
Evaluation by the Hard Money Lender
As a hard money lender, my initial focus is the merits of the transaction. The feasibility of the proforma as to the period of renovation leading to stabilization is measured against the market study and the value-add appraisal. These are the merits of the deal.
Then, I look to the client and the proposed equity investment. The client’s equity and the feasibility of the proforma are the factors in the measurement of risk.
This measurement determines the loan amount relative to the capital stack. A privately funded lender will lend higher into the stack, thereby lowering the out-of-pocket equity required of the borrower. This additional cash can be used in acquiring additional properties to grow the portfolio.
It is always my objective to exercise entrepreneurial muscle to determine the best loan terms for the borrower. I want my clients to be successful. Through their success, an understanding of the function and the proper application of a hard money loan will become known.
The use of a hard money loan is the best tool to grow or develop an investment portfolio.
If you are interested in purchasing real estate or need funding for your next project, contact the highly reputable and respected hard money lender in Los Angeles, PB Financial Group. PB Financial is a premier, direct hard money and bridge lender who has been providing quick funding since 2006 and has funded over 2,700 hard money/private money loans. Our objective is to satisfy your financing needs on important real estate projects throughout California in an efficient manner.
To learn more about how to successfully finance your next real estate venture, please contact PB Financial Group at 877.700.3707 to schedule a consultation or visit www.CalHardMoney.com to learn more.
PB Financial NMLS #357614/DRE #01522495
