Alternative Form of Financing – Money Loans

Hard money loans offer investors and others a viable alternative to bank financing. We look at why this alternative form of financing is viable when institutional financing is not.

Hard money loans these days are gaining popularity among many as an alternative to bank financing. There are a number of issues that have led to this rise in popularity, but at the root of it all is the collapse of the real estate market and subsequent credit crunch. Due to their nature, however, hard money loans are flourishing in these tightened financial markets.
The nature of alternative financing is much different than the structure you may find on an institutional loan. The banks and other traditional institutions have different rules to play by. They are subject to capital requirements, which is regulated by the government, for one. These capital requirements have been raised in light of the financial turmoil, meaning many small community banks who were once the source of funding for small commercial properties must hold onto their cash rather than lending it out. This is not true of hard money.
With hard money (or private money, the terms are often used interchangeably), you are dealing with an individual, or a group of individuals. These individuals are not subject to such government regulation, they are free to invest money in first trust deeds, and they do so, earning a much better return than what they may earn in a CD. The fact that the banks cannot make loans, or that they have tightened up their standards so much that many 'bankable' borrowers cannot obtain the loan they need means that investors now have excellent risk levels in relation to the return on investment they make. It is not uncommon for an investor to earn 10-12% return on their money, secured by a piece of property that has 40% or more in equity.
An incentive trust can provide numerous benefits to the grantor. If structured as an irrevocable trust, it is an effective means of transferring assets and future earnings out of the grantor's estate, thus escaping estate taxes. For many grantors, however, the tax benefits of establishing such a trust are secondary. These individuals are often attracted to its non-tax attributes, such as using the trust to establish a legacy, a way of passing on core values to younger generations. The trust can also serve as a motivational tool, encouraging beneficiaries to obtain a certain level of education or to seek gainful employment, which might not occur if the child grew up with money and developed a strong sense of entitlement.
Additionally, when dealing with residential properties, most loans these days are sold only to Fannie Mae, Freddie Mac, or are FHA or VA type loans. The secondary market for residential loans is practically gone. What this means is that if a file does not fit the strict underwriting guidelines that these entities require, the borrower cannot obtain a loan. Again, our private investors do not have this restriction. If the transaction makes sense, there is often a loan that is able to be funded.
With interest rates low, there is a lot of private money available to finance nice conservative real estate transactions. While banks may have their hands tied, private investors are able to move forward with deals that make sense. This creates a win-win situation where the investor makes a great return on the money being borrowed, and the borrower is able to obtain financing that otherwise would not be available. It may be more expensive than a bank loan, but it is much less expensive than having to take on a partner!

Article Tags: Money Loans, Hard Money

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