I recently read a post from a real estate investor telling the story of how he acquired a lucrative property. As he got into the details of how he financed the acquisition, it became clear that he did not use hard money or a bridge loan. He used an acquisition loan. I was surprised. My research into real estate investing suggested to me that most investors prefer hard money.
It turns out that hard money and acquisition loans are distinctly different. Both can be used to obtain property, but acquisition loans are designed for different purposes. In addition, there are things borrowers can do with acquisition funding that cannot be done with hard money.
More About Acquisition Loans
Although there are exceptions to the rule, acquisition loans are usually designed for business lending purposes. They are leveraged to purchase business assets, strategic assets, etc. Finally, they are almost always utilized by companies rather than individual investors.
Banks and specialized lenders write most acquisition loans. Because these are specialized loans, lender approval and underwriting processes are quite different compared to what is typical for conventional loans.
More About Hard Money Loans
Hard money loans can also be leveraged to acquire business assets. But according to Actium Partners out of Salt Lake City, Utah, the vast majority of hard money goes toward purchasing investment property. Hard money loans are used to acquire commercial office buildings, warehouses, residential rentals, strip malls, and so on.
As for who provides hard money, it is generally the domain of private lenders. Banks do not offer hard money for reasons I don’t need to get into in this post. They will do bridge loans from time to time, but it’s awfully hard to convince a bank to get in on a property investment. So hard money lenders handle bridge loans as well.
Rates and Terms
Both acquisition and hard money loans tend to come with interest rates that are higher than their conventional counterparts. However, rates on acquisition loans tend to be lower than hard money. How much lower depends on private lenders and what they choose to offer on hard money and bridge loans.
Is not unusual for hard money rates to be several percentage points higher than conventional loans. Meanwhile, acquisition loans are more closely aligned with conventional rates. They will not be nearly as expensive as hard money.
As far as loan terms are concerned, an investor will never get an acquisition or hard money loan with a 30-year term. Terms on acquisition loans can run 1-5 years. It is rare for a hard money loan to offer terms exceeding 24 months. Special circumstances can dictate a 36-month term, but hard money lenders prefer to keep things under 24 months just to be safe. Believe it or not, 6 months is not unheard of in hard money.
Loan Approval and Funding
One last thing to consider is how loans are approved and funded. Acquisition loans are subject to more conventional processes. Lenders go through a typical underwriting process that could take from several weeks to a couple of months. They may take into account the value of the assets being obtained when determining approval.
On the other hand, asset value is the only determining factor in approving a hard money loan. The underwriting process is also much simpler. Hard money loans can be underwritten and funded in a matter of days.
Although acquisition loans can be utilized to purchase investment property, they are distinctly different from the more popular hard money loan. Both are quite different from conventional financing.
