FAQ

In a rising interest rate environment medium and long duration bonds can lose substantial value. Coastal Capital loans have short maturities averaging twelve months, preserving principal in a rising interest rate environment.

Due to the short-term nature of loans, the portfolio is constantly turning over as loans pay off. This allows investors to redeem their investment on relatively short notice.

Returns from investing in real estate loans/trust deeds are unlikely to move in tandem with returns in the stock market. Adding real estate loans/trust deeds to a portfolio will typically reduce overall portfolio volatility.

The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are higher risk and, therefore, if the mortgage is approved, the loan costs the borrower more.

A hard money lender is an investor or entity that makes loans secured by real estate, typically charging higher rates than banks, funding more quickly than banks and usually requiring less documentation than banks. Borrowers may use a hard money lender multiple times for various projects.

Hard money lenders differ from bank lenders in that they often fund more quickly, with fewer requirements and have funds from individual investors versus deposits on hand. Hard money lenders are sometimes called “asset-based lenders” because they focus mostly on the collateral for the loan; banks require both strong collateral and usually excellent credit and cash flow from the borrower.

Hard money lenders are willing to foreclose on and “take back” the underlying property if necessary, to satisfy the loan. Bank lenders typically look at the borrower to be able to pay back the underlying loan from the borrower’s income, whereas hard money lenders are comfortable looking to a sale or refinance of the property as the method of repayment.

The difference between a First and Second Trust Deed is the priority of the lean based upon the date that the Trust Deed is recorded. The earliest recording date has priority (i.e. First Position). A second trust deed has the increased risk of being 'wiped out' if the First were to foreclose prior to the second doing so. The First is required to notify the Second of the foreclosure process by a Notice of Default. If the borrower were to stop making payments to the First, the lender would have the right to foreclose even if the lender of the Second has been receiving their regular payments.

Typically, if the borrower was not making payments on the First, the lenders of the Second would strategically reinstate the First to keep it current and avoid being wiped out completely by the First foreclosing.

The rates for a First Trust deed average 7-10% versus 11-13%+ for Seconds.

Aggregating trust deeds into a fund is like buying a mutual fund that provides the benefit of diversification. Buying a single trust deed is like owning a single stock which will inherently be more volatile than a diversified mix of stocks.

Hard money lenders exist because many real estate investors need a quick response and quick funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency. With speed comes opportunity for both the borrower and the lender.

Even investors/developers with strong financial statements and access to bank credit frequently choose to use private money loans (also called “hard money loans”). Situations where private money loans make the most sense include those where the borrower:

• Requires a quick closing and banks cannot meet the deadline;
• Wants to use debt rather than equity for a project to maximize return;
• Wants to avoid spending too much time raising equity or debt from many different smaller investors, but prefers to instead focus on finding new opportunities;
• Lacks the patience or time to deal with the bureaucracy of securing a loan from a bank;
• Has an excellent investment opportunity, but does not have sufficient financial strength to get a bank loan, and/or;
• Has a bank line of credit but needs a larger loan than is allowed under the existing bank line.

The common theme is that there is an opportunity for the borrower to generate substantial profit (or savings) quickly, and the cost of interest and origination fees is small relative to the anticipated profit, even given the premium rates charged by private lenders.

Hard money loans can have several advantages over traditional bank financing including:

• A simpler application process and quicker approval/disapproval decision;
• Less scrutiny of the borrower’s personal financial situation, including income, employment status and historical tax returns, as compared to bank loans;
• Borrowers can allocate less time to seeking financing and instead concentrate on other business;
• Borrowers can avoid the risk of being rejected by a bank;
• Most hard money lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific asset under consideration;
• Self-employment is not seen as unacceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.

Disadvantages of seeking a hard money loan may include:

• Hard money loans are more expensive than bank loans, with higher interest rates and origination fees;
• The quality of hard money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on underlying real estate as a business strategy;
• Some lenders may collect non-refundable deposits without having the capital required to make the loan; they may either hope to find the capital once the loan is “tied up” or in rare cases, they may simply aim to collect the deposit with no intention of funding the loan.

Hard money lenders will lend on both commercial and residential properties, although many will not lend on owner-occupied residences due to higher thresholds of scrutiny required by law. Commercial properties can include industrial, shopping centers, and office buildings. Some, but not all, hard money lenders will also invest in raw land slated for development and even hotels.

Vacation homes (single family residences), even if not a primary residence, are considered “owner occupied” and may or may not be financeable depending on the lender’s criteria regarding owner-occupied home loans.

The “hard” in hard money lending refers to the higher price which is charged to borrowers both in terms of interest rates (typically high single digits or low double digits) and higher loan origination fees (often around 2 percent of the loan amount, versus 1 percent or less for a typical bank loan).

Hard money loans are typically funded by individuals or by funds that aggregate capital from multiple wealthy investors. Individuals who invest directly into a single loan are known as trust deed investors. Many trust deed investors are real estate investors/owners who invest in “bridge loans” to keep available capital working to generate a higher rate of return, rather than leaving the capital in banks earning minimal interest rates. Investors who prefer to invest passively in a fund are typically not as experienced in real estate investment and choose to pay the fund manager a fee to oversee the process of sourcing, selecting, and originating a series of bridge loans.

California is home to many leading hard money/private lenders. California has a tradition of private money borrowing and investing; it is a large state with huge numbers of properties and developers; and is a “non-judicial foreclosure state.” In California if borrower defaults, the lender can get control of the underlying property quickly (as long as the home is not owner-occupied) and liquidate it for payment. In contrast, some states with a judicial foreclosure process are less appealing for private lenders, because the foreclosure process can be long, arduous, and expensive.