Utah’s real estate market has been strong for more than a decade. Among commercial investors, however, the real estate gold rush has moved beyond the resort areas. The most successful investors are putting their money into Utah County, specifically in areas like Lehi and Saratoga Springs. Yet, regardless of where they invest in the state, long-term challenges remain. For example, how does an investor move fast enough to acquire highly desirable properties in a super-competitive market?
There are ways to do it and wind up being saddled with high-interest, short-term debt. But there is a more affordable strategy known as the ‘Buy and Hold Bridge’. This is a two-step strategy that combines hard money and Debt Service Coverage Ratio (DSCR) loans.
Hard Money for Acquisition
From strip malls to office parks to vacation rentals, Utah County has at all. The county is also seeing a lot of competition for multi-family housing units to accommodate an influx of tech talent moving to the Beehive State for work. So when an investor lays his eye on a new property, he needs to move quickly. He does not have 45 days to wait for a bank.
For acquisition purposes, there is no better option than a hard money loan. Actium Lending is a Utah hard money lender specializing in real estate transactions. They say hard money offers three distinct advantages during the acquisition stage:
- Hard money can typically close in 7 days or less, easily beating out buyers looking at traditional banks.
- Hard money can fund the ‘ugly’ houses that traditional lenders tend to avoid.
- Hard money can scale quickly depending on a transaction’s unique circumstances.
What must be understood is that hard money loans come with slightly higher interest rates and significantly shorter terms. On average, Actium says hard money loans have terms of 6 to 24 months. Keeping the term at 12 months or lower is ideal.
During the hard money term, the investor’s primary goal is to stabilize the property and its income. Once accomplished, he can move on to the second stage of the Buy and Hold Bridge strategy.
Refinance Into a DSCR Loan
Once a property is stabilized and tenants are placed, the clock starts ticking on an investor’s bridge loan. That means it is time to start working on transitioning to a DSCR loan. A DSCR loan is typically a commercial or investment loan underwritten based on a property’s cash flow rather than the borrower’s creditworthiness. So unlike a traditional loan that would be used to acquire an investment property, underwriting a DSCR loan is based on one thing: does the property’s income cover its debt?
Actium Lending says Utah investors appreciate DSCR loans as a hard money exit strategy for three reasons:
- Hitting the Sweet Spot – Rental rates have stabilized throughout Utah, making the 1.20-1.25 DSCR ratio very doable. When an investor can hit this ratio, he can get good rates on his refinancing package.
- No Seasoning Requirements – Conventional Utah lenders do not necessarily have seasoning requirements in place anymore. So if an investor has added significant value through property renovations, he can usually refinance based on a new appraisal value.
- Legal Protection – The typical DSCR loan allows an investor to borrow in the name of an LLC. This is an ideal situation for investors looking to keep their personal and professional liability separate.
Conventional financing doesn’t tend to work well for acquiring new investment properties. But in Utah, hard money loans can act as a bridge to DSCR financing. Employing both via a two-stage financing strategy gets the job done.
