Let us begin this post with a question: is all debt bad? On the surface, you might think so. However, there are certain circumstances under which debt can be a good thing. Property investing is a prime example. Financing acquisitions through hard money loans can actually boost an investor’s returns over time.
When this sort of thing happens, an investor enjoys what is known as ‘positive leverage’. There is also the opposite scenario of negative leverage. We have published a separate blog post explaining it if you are interested in learning more. In this post, however, we are going to focus exclusively on how financing property acquisitions can be a good thing even though you are taking on debt.
First Thing’s First
There are three things in particular investors tend to look at to understand whether financing is helping boost returns. But first thing’s first. It must be understood that financing property acquisitions, whether by way of hard money loans or traditional funding, has a price attached to it. Lending is a service. Lenders charge for that service by way of interest, fees, etc.
As such, the amount an investor pays to borrow is considered a cost of doing business. That cost matters when compared to a property’s net operating income (NOI) – the amount of actual profit after expenses have been paid. Keeping the cost of borrowing in line increases NOI and adds to better returns.
Boosting Returns by Financing
Moving on to the main topic, investors can enjoy good returns whether they finance new acquisitions or pay cash. Both options have their pros and cons. But in terms of financing, the debt it creates doesn’t have to be a drain on returns. In fact, financing can be an incredibly positive thing. Consider the following:
1. Moving on Deals Quickly
Hard money loans are obtained more quickly than traditional financing. In the investment game, this is important for the simple fact that being able to close quickly gives investors access to more properties at potentially lower prices. Commercial deals often go to the investors who can get to closing faster.
Returns increase when speed leads to lower sale prices. The less the investor pays on a property, the higher its potential return – at least in most cases.
2. Investing in More Properties
While investors can close just as quickly on all-cash deals, the one downside to going all-cash is tying up that cash. Financing with hard money allows the investor to spread available cash across more properties. The end result is scaling up one’s portfolio more quickly. At scale, returns increase.
Such a strategy actually compounds returns over time. As an investor’s portfolio grows, paying off one property frees up more cash to invest in the next. All the while, each property in the portfolio is returning monthly income and increasing in value.
3. Value-Added Investment Strategies
The last consideration is relying on hard money financing to support value-added strategies. These are strategies we will not get into in detail because they are not things we finance. Nonetheless, financing can help investors actually add value to their properties by covering some of the expenses involved in acquisition and development.
While most people consider debt a bad thing, we take the opposite approach to hard money for real estate. When approached wisely and managed properly, debt acquired through financing can be a good thing. Financing can actually boost returns. In fact, it should.
If you are looking to finance a property investment in Utah, Colorado, or Idaho, let’s talk. Actium Partners specializes in hard money for real estate investments.
