I just finished reading a fascinating post on the Investment News website. Written by contributor Steve Randall, the post resulted from an interview with a well-known Registered Investment Advisor (RIA) with the Saluda Grade firm. What most intrigued me about the post was seeing that RIAs are finally catching on to something hard money lenders have long known.
Hard money lending is asset-based. It is also private in nature. Because of the way it is structured and what lenders choose to invest in, the risk from asset-based loans is significantly less compared to other types of investments. In essence, asset-based lending offers both lenders and borrowers a healthy risk-to-reward ratio.
From the Lender’s Perspective
Hard money lenders, like Salt Lake City’s Actium Lending, are rather bullish on asset-based lending for three main reasons, all of which are mentioned in the Investment News post:
- Consistent income production
- Significant diversification
- Low correlation to traditional assets
The best way to understand these things is to look at hard money as a vehicle for financing real estate transactions. According to Actium, property investors are the primary customers of asset-based lending by a long shot.
Making hard money loans to real estate investors produces a steady stream of income – for both lenders and investors alike. Returns are linked to tangible assets, making them less dependent on equity markets. And because the correlation to traditional investments – like stocks and bonds – is so low, asset-based lending is not as heavily influenced by market fluctuations.
A lender’s exposure is limited to the pools of secured loans it is currently servicing. But each loan is backed by a hard asset, usually real estate. So even when loans go bad, the risk of losing everything is fairly low.
From the Borrower’s Perspective
Asset-based lending has a ready audience of borrowers in the real estate market. Fast access to hard money only enhances their ability to build strong portfolios comprising properties that continually generate monthly income.
Borrowers can develop working relationships with their preferred lenders for more favorable rates and terms. They can work with lenders to tailor each loan to meet the need at hand. Best of all, they never have to go through the hassles of trying to get traditional mortgages that may or may not suit what they are trying to accomplish.
This all points to one of the most fundamental truths of asset-based lending: it is the funding that drives the real estate investment industry. Without access to private, asset-based lending options, property investors would struggle to raise the capital needed to expand their portfolios in a timely and cost-efficient way.
What It Means to RIAs
So, what does this mean to RIAs? If the Investment News article has it right, it means RIAs should start giving serious consideration to recommending asset-based lending opportunities. Investors looking to diversify while taking advantage of the property market can put their money into asset-based lending firms.
RIAs have historically avoided asset-based lending because of regulatory restrictions. But those restrictions are beginning to ease. And as they do, opportunities for investment are emerging. These are opportunities that RIAs should at least be looking at.
Hard-money lenders have long been the biggest proponents of asset-based lending. They have taken a lot of heat over the years because of so many misconceptions about private hard money and bridge loans. But now that the haze of misconception is lifting, the rest of the financial services industry is learning a lot about asset-based lending that was previously unknown. That is good.
