Before you are able to get into a hard or private money loan in Colorado, you must determine how you will get yourself out of it. Contrary to the popular myth, reputable hard money lenders do not want to own your property. Hard money lenders make their money off the returns on their investments in asset-secured loans, not by foreclosing and auctioning off properties on which borrowers have defaulted. They will want to be assured that you, the borrower, have a plan in place to pay off the loan when it comes due before they will agree to underwrite it for you.

It is a good idea to troubleshoot your various exit strategy options with investment partners or members of your management team. They may have experience that will bring a different perspective to your plan. An experienced private money broker can also give you advice about any holes that are in your plan.

Hard money loans in Denver typically require repayment by the borrower within one to three years. They are a short-term borrowing aid, not a long-term funding solution. There are many different ways to exit your hard money loan. We will take a broad look at the most common exit strategies here:

1. Refinance with a commercial mortgage from a traditional lender. This is the best exit strategy if you want to maintain ownership of the property. You can use the hard money loan to buy the time you need to renovate the property or establish your business as viable in order to meet the stricter requirements of most institutional lenders. Your exit strategy, then, is to pay back the hard money loan with less expensive, long-term financing.
2. Refinance with an SBA 504 loan. Hard money loans can often serve to bridge the gap while you’re waiting for approval on an SBA loan which can often take up to five months. This way you can replace your hard money loan with cheaper financing while still being able to buy the property you want when you want it.
3. Re-sell the property. If you’re only interested in renovating or rehabilitating the property, then your exit strategy will be to sell the property for a profit in order to repay the hard money loan. In this way, the hard money loan gives you the necessary funds to pay for construction costs, which you will (hopefully) make back when the improved property is flipped.
4. Pay the debt off with business capital. Another exit strategy can be to use money from other properties, your business, or other investors in order to pay back the hard money loan. In this way, the loan grants you the necessary time to find additional capital or investors.

Planning an exit strategy requires you to work backwards, starting at your end goal (whether that is ownership, portfolio expansion, or flipping) and working your way back to the present. It is important for both you and your private lender to know how you plan to retire the loan to ensure that you both benefit from it. Having a logical exit strategy in your back pocket will make you a more appealing borrower to reputable hard money lenders.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.