Hard Money Loans vs Private Money Loans

Hard Money Loans vs Private Money Loans

When determining financing for your next real estate project you may come across various types of funding methods.

Two common forms of funding for real estate investors who do not qualify for traditional bank loans are hard money loans and private money loans.

They share similarities but also have distinct differences, and there are pros and cons to both types of loans.

Relationship

Private money lenders are more relationship based and don't advertise. They are commonly someone the borrower already knows – for instance a family member, neighbor or friend.

If you don't have a lender in your close inner circle you'd need to network more effectively to find them.

Additionally, if your real estate project goes south, you run the risk of not only losing your money and the investors' money but also of destroying the relationship.

Hard money lenders are generally more business based than private money lenders.

A good hard money lender is likely to be more organized, experienced and professional than a private lender and will gauge the risk of the project more accurately.

If the project fails, they will likely foreclose on the property in an attempt to get their investors' money back.

Supply

Private money lenders are dependent on the borrower's network and are generally a short term one time solution and are not always there when you need them.

Also, it might be difficult to go back and get subsequent funding for additional projects.

In contrast hard money lenders are easy to find online and are always looking for repeat business.

Hard money lenders are considerably more reliable, dependable and readily available to help you scale your real estate investments by providing access to ongoing funding.

They are in the business of cycling through a large supply of capital and are always working to have money out in the market collecting interest.

Not everyone may have access to private money (since it's network dependent), but if you have an asset of value, finding a hard money lender should be easier because the collateral is the biggest factor in qualifying for a hard money loan.

Terms

Private money loans are generally more flexible and will have lower fees and interest rates.

The term length may be longer and the private money lender will likely give you a higher loan to value ratio.

In contrast the majority of hard money loans have a shorter 12 to 60 month term length. It's also rare for a hard money lender to fund more than an 80% loan to value ratio.

Requirements

Hard money lenders are generally non-institutional or semi-institutional lenders and depending on what state they reside in, they may be required to have a license.

These HMLs will likely have defined lending criteria, whereas with private lenders the terms of the deal and requirements might be unique and/or flexible.

Due to the Dodd-Frank Act, hard money loans cannot legally be used for owner occupied properties. In contrast, private money loans have a much broader scope and can be used on all types of investments including owner occupied properties.

The Bottom Line

While you can see there are benefits to each of these two types of lending, the ironic truth is; hard money lenders are often just storefronts for a collection of private money lenders.

The advantage is hard money lenders are much more organized, experienced, have a track record and can help you scale your business in an efficient and reliable manner.