The Difference between Participating Commercial Mortgage and Hard Money Loans

Both participating commercial mortgage and hard money loans are common avenues that real estate investors pursue when looking to fund a new or existing project. Learn the difference between the two and which one may be right for you.

According to CNBC, the Federal Reserve recently reported that loan officers at U.S. banks are tightening lending standards on commercial mortgages. This includes standards for construction and land development loans as well as loans secured by multifamily residential properties. This loan environment causes real estate investors, builders and businesses to take a look at alternative lending operations. Two of these alternative strategies include participating mortgages and hard money loans.

A participating mortgage loan is just that—participating. This means that the lender shares in part of the revenue that the commercial property generates. In addition to the mortgage payment and interest, they will also receive their share of the profits which may come in the form of rental income or proceeds from a sale. These types of loans are common in office and retail projects as well as apartment properties where long-term leases are involved. It is attractive to borrowers because the lender, in these instances, may accept a lower base interest rate and a higher loan-to-value ratio.

These are often high-risk loans that a conventional lender would not be able to make.

A hard money lender is usually a private group or individual investors that offer commercial and sometimes residential loans. Underwriting criteria is less restricted than those of a traditional loan. They do require a plan, including an exit plan, as well as a reasonable loan to value. Creditworthiness does not play a large, if any, part in the decision to fund. In essence, it is really about available collateral. A hard money lender can approve and fund a commercial mortgage much faster—sometimes in as little as a few days. This is valuable to investors needing to get going on a project or a business needing immediate funding for their operations.

What Types of Property is Not Funded by These Alternative Sources?

In most cases, a hard money lender will not make a loan on an owner-occupied residential property. This is due to increasing regulations by the government and stricter guidelines. For others, the location and the market matters just as much as the type of property. Some lenders focus locally while others are available for nationwide lending.

There are specific questions you will need to consider for either type of commercial mortgage.

There are inherent risks in either type of loan. Be sure to ask the prospective lender for a full disclosure of fees and conditions. Don’t be shy when asking about their background and experience. Working with a mortgage loan broker can give you access to hundreds of investors with one phone call. The mortgage broker will, in turn, determine what investor would be best for your particular project and what the best rate is that they can obtain for you.

Dennis Dahlberg
Broker/RI/CEO/MLO
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701

About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.