Multi-family properties can represent a very lucrative investment, especially in strong markets like Salt Lake City. The hard part is obtaining new properties and stabilizing them through the lease-up phase. Financing is a big issue. Traditional lenders tend to shy away from investment deals when properties do not demonstrate at least 90% occupancy. So how is an investor to acquire a property that requires stabilization?
Actium Lending has the solution: a Salt Lake City hard money loan. Actively writing loans in three states, Actium frequently funds multi-family property acquisitions. They provide the funding investors need to acquire and stabilize properties. Once stabilized, the investors can then turn to traditional lending to refinance.
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Getting Through Lease-Up
Acquiring a property with occupancy of less than 90% could seem foolish to someone who doesn’t invest in real estate. But there are very good reasons for low occupancy. Often those reasons can be overcome with some additional investment and effort.
Imagine a Utah real estate investor looking to buy a property with current occupancy sitting at 50%. The property’s bones are good. It’s in a great neighborhood that offers lots of amenities. And so why is it for sale? The current owner is no longer interested in putting in the time and financial resources being a landlord requires. He is ready to put rental property behind him and move on to other things.
To the investor, the property has a lot of potential. But it also comes with one big challenge: limited cash flow from the time of acquisition through lease-up. This represents a period of time in which he will be spending money on improvements without generating additional income through new tenancies. Nearly any traditional bank he approaches will turn him down for this very reason.
Cash Flow Is Critical to Performance
To a bank, cash flow is critical to performance. The investor needs to have enough cash to both make monthly loan payments and revitalize the property. Low occupancy could mean insufficient cash being generated by the property itself. So now the borrower needs to look at other sources of revenue to make up for the shortfall.
While limited cash flow is challenging, hard money offers an advantage that traditional lenders do not: interest-only payments.
Actium Lending explains that interest-only payments can be substantially lower than traditional payments that include principal. By collecting only the interest on a monthly basis, a private lender is allowing the investor to keep more of his cash. That cash can be put toward property stabilization.
Actium explains how this works with a real-world example. They once wrote a loan on a multi-family property that the investor’s bank initially approved but then backed out on. Without funding, the deal would have fallen through. But Actium wrote the loan, funded the acquisition, and then collected monthly interest payments while the investor stabilized the property. Months later, the investor refinanced with a traditional loan after having reached acceptable occupancy levels.
Hard Money Is a Way to Get There
The fact that traditional lenders are reluctant to fund properties with low occupancy doesn’t mean that traditional financing is bad. In reality, traditional financing isn’t built to assume such high risks. But it still has a role to play. Its role comes into play after a property has been stabilized.
Hard money represents a way to get there. It is a tool for funding acquisition that southern investors can purchase, stabilize, and then move to traditional financing. With hard money as the acquisition and stabilization tool, traditional lending becomes a more reasonable long-term financing option with plenty of bank support behind it.