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Small investors chasing big returns with private real estate lenders

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Alpha Funding Solutions Ceo Mark Callazzo, left, and President David Hansel.
Alpha Funding Solutions Ceo Mark Callazzo, left, and President David Hansel. - (AARON HOUSTON)

Michael Adler has long said that everyone should own “a little piece of Apple stock.” But when missed earnings caused share prices to drop late last month, the Aberdeen dentist felt much better “knowing that I don’t have all my eggs in the stock market.”

Some of those eggs have been with Alpha Funding Solutions, a Lakehurst-based private lender that offers short-term financing for real estate projects. He has been an investor since 2010 — and he hasn’t been disappointed with the results.

“In today’s stock market — with things going up, things going down — it’s nice to have a portion of your portfolio that gives you a very secure, low-risk investment,” Adler said. “Twelve percent is an excellent return.”

Alpha Funding Solutions isn’t alone as a firm that uses private capital, such as cash from retirement plans, to make loans for rehabilitation and construction projects. And experts say the practice stands to grow in New Jersey and nationally as people seek alternative, higher-yielding investments — and become more comfortable with real estate.

Like Alpha, which was founded in 2007, such lenders arrange high-interest funding for projects that banks won’t go near. David Hansel, the company’s president, said that void is especially prominent in so-called fix-and-flip projects with short turnarounds times, creating a market for the so-called hard-money lenders.

The capital comes from private sources, such as the retirement accounts of chiropractors and attorneys, and the investors become the property owners if the borrower defaults. Meantime, those borrowers “pay a premium” for the fast service, he said, so investors routinely see returns in the low- to mid-teens.

“There are always opportunities where there’s good value in the property and there’s a profit for the guy that’s going to run the project,” said Hansel, whose firm has about 120 investors and recorded nearly $30 million in loan volume last year.

He said private lending is nothing new and investors have always sought alternatives, but the growing exposure of fixing and flipping “has created a lot more demand.” Helping drive that interest are commercials and television shows such as “First Time Flippers,” plus New Jersey’s vast “shadow inventory” of foreclosures and distressed properties.

That has presented alternative opportunities for professionals seeking to grow their retirement accounts, said Jaime Raskulinecz, CEO of Livingston-based Next Generation Trust Services LLC. The firm, which administers nearly $500 million in self-directed retirement funds, has seen its holdings of “real estate and real estate-related assets” increase by 25 to 30 percent from 2012 to 2013.

Raskulinecz said using those funds to invest in a non-publicly traded asset such as real estate is “kind of a well-kept secret.” But as people become more willing to invest their taxable money, they’re also “finding out that they can do it with their retirement plans.”

“If you’ve made good returns and had success doing it with taxable money, why would you not want to get the same returns on your retirement account?” Raskulinecz said. She added that large entities have done private lending for years, but there are also “newer, smaller companies popping up that are doing just the same thing, just on a smaller scale.”

Aside from higher returns and lower risk, hard-money lenders say they’re selling an asset that’s able to be touched and seen. Frank Resta, a longtime real estate owner who started lending about three years ago, said investors get an added level of comfort from being able to visit the project site.

“You can write that check to a brokerage house and get some monthly statements,” said Resta, who operates Restasure LLC. “Here you can go and look at the property, so you have a real asset that you can drive by and watch it being rehabbed. And that’s the exciting part — watching it from the beginning to the end, and everybody makes money with it.”

Critics say hard-money lending can be risky for both investors and borrowers as it cuts out many of the credit requirements and regulatory constraints that banks face.

But firms such as Alpha Funding Solutions say they have safeguards, including putting up at least 10 percent of every loan.

“People take comfort in that,” Hansel said. “Not only are we underwriting it and servicing it, our money is on the line, too.”

E-mail to: joshb@njbiz.com
On Twitter: @joshburdnj

Joshua Burd

Joshua Burd

Josh Burd covers real estate, economic development and sports and entertainment. Before joining NJBIZ in 2011, he spent four years as a metro reporter in Central Jersey. His email is joshb@njbiz.com and he is @JoshBurdNJ on Twitter.

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