If you're doing the kind of real estate investments that traditional lenders don't touch, you eventually have to decide between hard money vs. cash. Investing with cash is simple and inexpensive, but it limits your returns and your scope while also increasing your risk. If any of these situations apply to you, you should consider taking the hard money side of the hard money vs. cash debate.
1) There Are More Deals to Do Than You Can Afford
One of the biggest benefits of using financing is that it gives you more money to work with. If homes are selling for $200,000 in your area and you have $400,000, you can buy two. Taking out 50 percent loan-to-value hard money financing lets you stretch your money to buy four and, if you can qualify for a 60 percent loan, you can purchase five.
Given that many parts of California still have a surplus of attractive homes for investors to purchase, the area in which you focus could very well be filled with opportunities. However, as the real estate market continues to normalize, these great chances to buy could gradually start going away.
2) Undiversified Risk Scares You
When you use financing, you get to share the risk of investing with your lender. If you put all of your cash in a property and something does go wrong, you lose all of your cash. Taking out a loan so that you only have to use half of your money means that, if something happens, you will still have half of your money. At the same time, involving a lender provides a check and balance to hopefully reduce your risk since the lender will not be willing to make a loan if it doesn't think it can get its money back.
3) Margins Are Broad
It's true that bringing in a hard money lender isn't cheap. You'll have to pay origination fees and interest for the use of someone else's money. However, the ability to make more high-margin investments more than makes up for the fees. For instance, if you bought a $200,000 house and sold it for 300,000 after a bit of work, you'd make a 50 percent return. If you used the same $200,000 to buy two houses with loans, you'd get a $200,000 profit, and a 100 percent return. Paying a few fees for that is a cheap investment for what you stand to gain.