I’d like to compare hard money to private money, which are in ways similar, in ways different, but definitely confused with one another when investors discuss them.
Both hard money and private money are typically asset based loans, backed more by the strength of a real estate purchase than the financial credentials of the borrower. They are both from non-traditional lending sources. (Neither are banks or national lenders.)
So what makes them different?
Hard money lenders, despite their non-traditional status, are still organized money lenders and are usually in some way licensed to loan money.
Private lenders are just what their name suggests–private. They could be a friend, family member, business associate, or maybe just a professional referral. In any case, their role as a provider of funding is strictly as you agree upon with them.
Hard money lenders typically have lending criteria. Their loans have defined durations, interest rates, and upfront points, all of which are known prior to a loan ever being issued. In fact, these criteria are often used to differentiate and select hard money lenders, when investors are shopping for available options.
Private money is much more flexible on all of the points mentioned above. Most have no preset criteria, and the loan terms you work out with them are almost always a function of how well you negotiate them for a particular loan.
Limits on lending, interest rates, and loan duration are all, as they say, “open for discussion,” so a simple commitment to an agreement suitable to all parties will often get the job done.
Private money is more flexible–and usually cheaper!
An important thing to mention is that private money is characteristically cheaper than hard money. This is notalwaysthe case, but it is a common trend nonetheless.
Why? Most hard money lenders get their funds (at least in part) from private sources, so they must mark up their interest rates and fees to make a profit. When you work directly withprivatesources of capital, you effectively cut out the “middle man” and can be in line for better terms.
Hard money is usually easier to find
The obvious caveat to private money is that lenders are not usually out there advertising that they have money to lend. Hard money lenders will often do just that because they are specifically in the lending business. It just makes sense for them to promote what they do.
Because of this, hard money is usually easier to find and requires fewer business/negotiation skills to secure a loan.
But if you are willing to make the effort, private money…
- is out there
- is very comparable to hard money, and
- is therefore an excellentway to fund real estate deals