Hard Money is Becoming Harder by:Dominic Mazzone
This investment perspective comes straight from the rooms in banks that are filled
with the proverbial bean counters known as underwriters that are making the lives of hard money lenders very easy and very profitable. It's clear that the banks are running out of money, good decisions and good excuses for denying loans to businesses, property investors, and individuals. It seems that we have reached the lunatic fringe in that even a person with AAA credit, great income, and a substantial net worth is not deemed as credit worthy. Realizing that banks are hoarding cash to try and make it through one, if not the worst financial crisis in US history, it now seems that the new paradigm in lending guidelines is that you must have more money sitting in a bank account than the amount you want to borrow.
It is because of this that hard money lenders are being asked to step up to fill the vacuum created by the credit crisis. Hard money, aka private money or any financing that is an alternative from conventional bank financing, is quickly becoming one of the only funding sources to get deals done. Many Asset Based Lenders (ABL) in the form of ABL Funds are operating as hard money lenders, and generating large profits for their investors. The only problem that hard money lenders are facing right now is running out of money to lend, because the demand from borrowers is absolutely overwhelming. Investors are becoming aware of this and we should see an inflow increase into these funds.
One might argue that the economic crisis is going to effect the borrower repayment of these hard money loans, and they would be right in that assumption. The big difference is that ABL fund's are lending at very low loan-to-values, and even in a distressed market, they sit in a position to profit. Rates seem to be between 11%-20% and rising due to the demand. In addition, these funds are charging upfront points that range anywhere between 2%-10% depending on risk and loan amounts. The old adage goes that "cash is king", and hard money is becoming the king's champion.
ABL Funds operating as hard money lenders were doing very well when real estate was booming and are in a position to continue that trend in the down market. One interesting correlation to consider is this; as interest rates begin to rise, how high will hard money rates go if the banking guidelines remain tight? Only demand will tell.
About the author
Copyright: Dominic Mazzone, Regent Global Funds 2008
This article was written by Dominic Mazzone, Managing Partner and Fund Manager of Regent Global Funds.
This article and other like it can be viewed at
http://www.investingsymposium.com which is part of the Regent Global Funds Network.
Regent Global Funds,
http://rgfunds.com, is an alternative investment fund that offers its participating investors and asset backed investment through asset based lending.
The Fund Managers of Regent Global Funds have an expertise in commercial real estate lending and have created a successful alternative investment vehicle that is diversified through this structure.
They separate themselves from other fund mangers by personally investing their own money side-by-side with their investors in the fund, creating an absolute structure of accountability. Dominic Mazzone has written about the need for this type of accountability in an article titled "Fund Managers Need to be Accessible and Personally Invested."
http://www.articlecity.com/articles/business_and_finance/article_10435.shtml
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