The tightness of mortgage money at savings and loan associations for small-scale real estate investments -- here and in other major metropolitan areas -- is spurring a renaissance of alternative finance approaches that sidestep conventional credit sources.

A boom in customized, locally arranged real estate finance is underway for investors and is pulling dollars into rental housing, historic district property rehabilitation and land development that normally would be invested elsewhere.

To some extent it is also permitting massive investments of capital into the rehabilitation of central-city Baltimore and portions of the District to continue, despite the mortgage crunch at S&Ls and banks.

Twenty months ago, the Washington area's real estate investment boom -- particularly the purchase of residential rental properties by small-scale investors such as two-worker families, professionals and retired military personnel -- was heavily financed by local S&Ls.

Mortgages for the purchase of non-occupant-owner, rental town houses in the city or rental homes in the suburbs were readily available at rates under 10 percent, with no cash placement fees or discount points up front. S&Ls were loaded with savings deposits and could hardly pump loans out fast enough to keep up with demand from local investors, as well as from primary home buyers.

Today's situation is different, S&Ls in the city have been losing deposits for months to higher-yielding money market funds and government-guaranteed securities.

Most of them have had to cut back on the number and size of loans for all forms of real estate, but particularly for non-occupant-owned, investment properties. The relatively few S&Ls that still maintain active "windows" for rental home and small multi-family unit purchases often charge two or more discount points at loan closing -- $1,500 in cash in advance on a $75,000 first trust -- and rates of 12 percent and higher. They also may require large down payments, prohibit second trusts and demand prepayment fees.

Metropolitan Federal Savings and Loan Association of Bethesda, for example, charges 12 1/4 percent and two points on 80 percent maximum investor mortgages -- an effective rate of 12.6 percent over the term of the loan.

A few S&Ls will provide cut-rate loans for borrowers who maintain hefty deposit balances, but the majority of Washington investors aren't in such a favorable situation.

As a result of the drought at the S&Ls and banks, investors and their real estate brokers have increasingly begun to arrange finance through alternative, often more flexible sources. One such broker is A. M. Barr of Arlington. Barr, who runs a real estate school and lecture series as an adjunct to his regular brokerage business, has observed what he called "a six-fold increase in the amount of creative finance going on in the last six months."

Investor-oriented brokers like Barr traditionally advocate use of locally arranged second trusts, along with conventional first mortgages, to cut investors' cash outlays. But now Barr is custom-packaging first-trust money for clients who need it.

He will, for example, provide a qualified investor a $100,000 first deed of trust at 14 percent for five years, for purchase of a high-potential piece of real estate here.

Payback terms can be structured to suit the needs of the borrower, and can employ interest-only features and balloon payments at the end of five years. Refinancing the debt at prevailing rates is possible at the end of the term, and no prepayment penalties get tacked on for early retirements of the note.

Barr raises most of his flexible first-trust money from other local private investors -- often high-income professionals who want returns that outpace inflation, but with relatively little risk.

Five investors might put up $20,000 each, and take proportional interests in the loan, secured by the investment property. Each investor receives 14 percent on his or her money; Barr charges the borrower a fee for putting the deal together -- $1,000 in the case of the $100,000 loan -- and sometimes invests in pieces of notes himself.

At 14 percent, secured by conservatively chosen Washington real estate, "I can't pass it up," he commented.

The advantages of non-traditional first-mortgage money packages like these for small investors are significant: They may be the only source of cash available on a particular property, however good an investment the project actually is. And they offer a flexibility in terms -- if negotiated properly by the investor -- unobtainable from conventional sources, even in the best of times.

The disadvantages of this type of financing are also noteworthy: Improperly drafted, a custom-brokered first loan can turn into a legal nightmare for participants on both sides of the table, in the event of defaults or problems with the valuation of the property. And the going interest rate -- 14 percent in this case -- tends to be a couple of notches above what's available from conventional sources still active in the market.