Why Conventional Funding Is a Legit Hard Money Exit Strategy?

Hard money lenders expect to see a reasonable exit strategy before approving loan applications. An exit strategy is basically a plan for repaying the loan on its maturity date. Without a workable strategy, it is hard for a lender to see its way clear to making what amounts to a risky loan.

Conventional funding is one of the exit strategies commonly utilized by property investors. Salt Lake City’s Actium Partners explains it this way: a client will apply for a hard money or bridge loan to obtain a new piece of property quickly. Over the course of the next several months, the borrower will arrange conventional financing that covers repayment of the hard money loan.

Why Hard Money to Begin With?

To the untrained eye, conventional financing as an exit strategy does not make a lot of sense. Why doesn’t the investor go straight for a conventional loan from the start? There are two issues to consider:

  1. Bank Reluctance – Conventional lenders are not generally enthusiastic about helping investors obtain new properties. There is too much risk involved. After a property has been acquired and starts generating revenue, the risk goes down.
  1. Closing Speed – Conventional lenders generally require months to get from application to closing. Real estate investors rarely have that much time. They need to get to closing in a matter of days. Hard money lenders can make it happen.

Hard money lenders appreciate conventional funding as an exit strategy because it is reliable. But what about the borrower? Is there anything in it for the investor, above and beyond the ability to get a hard money loan? Yes. Consider the velocity of money concept.

Recouping the Initial Investment

The velocity of money is a general economic concept that describes how quickly money flows through a given environment. In property investing, the velocity of money is applied to how quickly an investor recoups his initial investment. The faster it happens, the higher the velocity is.

Higher velocity allows an investor to turn his money over more quickly. He pulls it out of one investment and puts it into another. The faster he can do this, the quicker he can grow his portfolio. So the question then becomes this: how does conventional funding, as an exit strategy, play into the velocity of money?

Let us look at two scenarios:

1. Flipping Investment Properties

One way to make money in real estate is to flip properties. An investor might rely on hard money or bridge loans to quickly obtain lucrative properties. Imagine loans with terms of just 6 months. Conventional funding can keep that investor going even if it takes 12 months to get a property ready for sale.

If the investor can sell the property within a year, he quickly gets all his money out of it. He then puts that money into obtaining new properties. Growth becomes a matter of repeating the cycle indefinitely.

2. Holding Properties Long Term

Another strategy for making money in real estate is holding properties and renting them over the long term. Again, conventional funding is an effective exit strategy because it gives investors access to hard money and returns part of their investment quickly.

Conventional funding always requires a down payment. But that down payment should be significantly less then what the hard money lender requires. The difference represents money he immediately returned to the investor when a conventional loan closes.

Hard money borrowers can offer virtually any exit strategy that suits them. But the lender ultimately has to approve the strategy, which is why so many investors choose conventional funding.