Although the surplus of transitional properties available in the aftermath of the 2008 financial crisis has largely returned to normal levels, there are still many opportunities to make such investments, and hard money loans can help to ease the acquisition process.

What Qualifies as Transitional?

There are a wide range of properties that can qualify as transitional, ranging from those that have been mismanaged or neglected to those that are undersized or underperforming and in need of expansions or upgrades. Transitional properties typically have capital, cash-flow, maintenance, or positioning problems that need to be solved. If you do not have much experience in troubleshooting property issues, it can be useful to assemble a management team of experienced individuals to advise and assist you.

Identifying Investment-Worthy Transitional Properties

Not every distressed property that can be purchased at a discount is a good transitional investment opportunity. Location plays a huge role in finding hidden gems in which to invest your money and time. Research your local real estate market to figure out which areas are currently targeted for revitalization or gentrification projects. Distressed properties in these areas are the ones most likely to yield satisfactory returns on your investment, which will in turn make it easier to secure the necessary funds to purchase and rehabilitate them.

Using Hard Money to Acquire Transitional Properties

The problems that make transitional properties appealing as investment opportunities are usually the same ones that make them difficult to fund through conventional means. This is why bridge financing and other short-term hard money loans are popular options for borrowers, regardless of their personal credit history. Private lenders are more willing to see beyond the current state of the property (and its financial records) to its future, repositioned potential. When submitting an acquisition loan request to a private lender, you should expect questions about how you will solve any current issues in order to reposition the property and restore or increase its income stream.

Funding Improvements to Transitional Properties

The other reason that hard money loans are particularly useful for investing in transitional properties is that private lenders have the freedom to use the after-improvements value of the property to set the loan-to-value (LTV) rate. This means that if you’re purchasing a distressed property at a steep discount for $100,000, but its appraised value is $130,000, then the 65% LTV that most private lenders offer will provide you a higher Loan-to-Cost ratio. In some instances, the hard money lender may also be willing to lend additional funds that are earmarked for rehabilitation costs. If you are requesting such funds, you should be prepared to provide cost estimates for any anticipated construction projects. Most hard money lenders will cap the loan to cost ratio so that the purchaser is putting in acceptable funds as well so that the lender is not the only entity with skin in the game.