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Fractional vs. Whole Loans
When investing in loans with Red Tower Funding, you can choose to invest in Whole Loans or Fractional Loans. Whole loans are just what they sound like: 1 investor buying 1 loan. If a loan has a value of $100,000 for example, typically the investor will invest that whole amount - $100,000 - to buy that loan.
Fractional loans on the other hand involve more than 1 investor investing in 1 loan. For the $100,000 loan that could mean 2 investors investing $50,000 each or 1 investor at $25,000, 1 investor at $35,000 and 1 investor at $40,000. Other variations are possible as well.
For fractional loans loan servicing is required, as the incoming payments need to be divided amongst multiple investors. Loan servicing is optional but recommended for those investing in whole loans.
The primary benefits of investing in Whole Loans include:
- The investor being in complete control of his or her loan investment.
- This includes being able to sell the loan at any time. (Fractional loans can also be sold, but the market for them is much less liquid.)
- In the event the investor needs to make a decision - such as wanting to foreclose if the borrower pays late - that decision is entirely up to the individual investor.
The primary benefits of investing in Fractional Loans include:
- Ability to accommodate lower investment amounts.
- Spreading investment risk: for example, if one of the investor's loans is paying on time and another late, the investor still receives income from the paying loan.
Other issues with Fractional Loans:
- Each investor receives their percentage portion of each loan payment based on their investment amount. In the usual case of the borrower's full loan payment, this is the advertised yield on the investor's invested funds.
- Each investor on a fractional loan must sign a certain agreement that basically says that any combination of the loan ownership in excess of 50% drives related decisions. For example, in the case of the above $100,000 loan with 1 investor at $25,000, 1 investor at $35,000 and 1 investor at $40,000, any 2 (or all 3) of those investors legally can make the decision regarding what to do with any issues that come up with the loan (e.g. in the case of late payments and default). Although this is legally true, practically speaking, most investors work for unanimity in decision-making. Also, for investors who don't know each other, Red Tower Funding usually tries to coordinate the same.
- In the unlikely event of foreclosure and reversion of the property to the investors, they will take ownership as Tenants In Common ("TIC") owners at the same percentages as their investments in the loan. In our $100,000 loan example above: 25% for the $25,000 investor, 35% for the $35,000 investor and 40% for the $40,000 investor.
Return to the Frequently Asked Questions section or review some high quality Trust Deeds available for your Investment consideration.
