 All mortgage lenders are basically real estate investors; they
lend money to finance the purchase of real estate in order to obtain a
return on their investment. Often lenders will pool mortgages and sell
them to other investors. Finding money with which to finance your
investment project is easier when you remember that any investor is
looking for a secure return on their money is a potential source of funding.
The loan market is divided into The Primary Mortgage Market,
made up of lenders that originate (fund) loans; and The Secondary
Mortgage Market, where loans are bought and sold after they have been
funded. By purchasing loans, the secondary market helps primary lenders
raise the capital they need to make further loans.
Primary Market Lenders
Savings Associations, Thrifts & Banks all have a fiduciary
obligation, regulated by the government, to protect their depositor's
funds. Mortgage loans generate income they can use to pay interest to
their depositors.
Credit Unions historically made short-term consumer and home
improvement loans although they have recently moved more into lending
against primary home mortgages.
Insurance Companies often invest a portion of their premium
income into large, long-term loans that fund commercial, industrial and
large multi-family apartment buildings.
Pension Funds typically invest money in real estate development
projects through banks and mortgage brokers. They also invest in large
commercial projects.
Endowment Funds from hospitals, universities, non-profits and
charities are increasingly used to fund commercial projects.
Mortgage Banking Companies originate loans with their own funds
as well as funds belonging to insurance companies, pension funds and
individual investors. They sell these loans to investors and typically
charge a fee for servicing the loans. As an active real estate investor,
mortgage-banking companies can act as an intermediary between you and
multiple potential passive investors.
Mortgage Brokers are neither lenders nor mortgage banking
companies. Brokers act as intermediaries between the borrowers and lenders,
providing initial loan processing services for both parties. Brokers are
paid a fee for their services by the lender and/or the borrower.
Private Money Lenders are typically investors willing to fund
higher risk real estate projects in return for higher returns on their
investment. Real estate investors sometimes use Private Money to fund
their projects because they expect to need the money for only a short
period of time and so the cost of the loan is low in respect to the
expected profit. (Some investors run into trouble when projects take
longer than anticipated and/or they cannot realize the anticipated sale
price at the end of the project).
Investment Syndicates
Investment Syndicates are typically established as business entities to
support the funding and development of real estate.
Participating in an investment syndicate allows investors with modest
sums to invest in large-scale development projects. Returns on the initial
investment may be in the form of on-going income from rents or from
capital gains when the project is sold.
Syndication may be Private, involving a small group of friends
or experienced investors, or Public, with participation in the
syndicate made through the purchase of real estate securities governed
under SEC rules.
Syndicates may be structured as General Partnerships or Limited
Partnerships.
In a General Partnership all partners have an equal share of the
profits or losses from the investment as well as equal voting rights in
respect to management decisions of the partnership. One or more partners
acts as Trustee(s) for the group, holding the title to any property in
trust for the Partnership.
In a Limited Partnership the General Partner manages the
syndicate on behalf of the other Limited Partners (investors). The
limited partners have no control over the Syndicate. Limited Partnerships
are frequently used by developers or real estate brokers to fund real
estate developments. The General Partner is paid from the profits of the
Syndicate and the Limited Partners share in the profits in proportion to
their investments. The liability (or exposure to losses) of each limited
partner is no greater than their investment in the syndicate. Any excess
losses incurred as a result of the investment are the responsibility of
the General Partner. NOTE: Selling an interest in a Limited Partnership
may be regulated under SEC and State regulations concerning the sale of
securities.
The Real Estate Investor's Choice
As a passive real estate investor you may consider
participating in projects either by providing funding through one of the
above mechanisms, such as becoming a limited partner in an investment
syndicate. As an active investor, you may be seeking to utilize other
people's money to buy real estate investments in order to generate income
and/or capital gains.
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As well as exploring all of the above funding sources,
active investors should also consider sources of funds outside of the
Primary Market such as:
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Credit cards (especially low-rate cards) with high
available balances.
-
Family members with money to invest (be sure to let them
know the risks involved).
-
Self-directed IRA accounts (personal or through friends
and family).
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Second loans or Home Equity Lines on your personal
residence (check the terms of the loans to be sure they can be used to
purchase investment property).
When searching for investors to fund your projects, remember
potential investors are seeking the highest return for the least risk.
Therefore, the more you can demonstrate reduced risk, the lower your cost of
borrowing (which is why lenders offer lower rates to low risk borrowers with
the best credit scores).
By preparing your project plans clearly and demonstrating a
commanding knowledge of your projected expenses, you can negotiate a lower
interest rate on your loans. |
