Hard money vs private lenders. What’s the difference?
If you are in the real estate investing game, you know there are quite a few ways to get funding for deals. Cash, using 401K, hard money, private lenders, local banks, and more.
But what is the difference between hard money and private lenders? Are they the same thing or are they completely different?
Let’s break it down.
Hard Money Loan
Hard money loans are short-term loan lending opportunities for real estate investors to use to finance an investment project. Hard money loans are not issued by banks, but by an organized money lender. The hard money lender will use the piece of real estate to determine the loan amount and rate.
Private Money Loan
Private money loans are loans from a private person. A private money lender can be family, friend, or an investor colleague who has taken interest in your real estate deal. The terms of a private money loan can vary depending on the lender. The private money loan lender wouldn’t be available to the public and doesn’t want to fund multiple deals to people they don’t know.
Who uses private or hard money loan lenders?
Investors who flip houses quickly could likely use private or hard money loans. Also, there instances where banks or traditional financial institutions will pass on lending a loan out due to the state of the property. If the property has a lot of damage, vandalism, or needs a lot of repairs, there’s a chance the bank won’t finance the deal.
What are the pros and cons of hard and private money lending?
Hard Money - Pros
- There is a better chance of getting a loan for a property needing work
- Hard money funds are disbursed faster than the traditional bank loan which could take up to 45 days
- Hard money loans could be more flexible than traditional bank rates and standards
- There are no prepayment penalties if paid back sooner than the due date unless the terms of the loan states otherwise. If the deal goes better than expected and the loan is paid back in full before the due date at a local bank, there could be penalties for doing so.
Hard money – Cons
- Hard money loans are typically short-term and have higher interest rates, so overall hard money loans are risky.
- If hard money loans are not paid back in time then there could be the risk of owing more money.
Private Money - Pros
- Private money loan terms can be whatever the lender desires.
- Since a private money loan lender is primarily someone who knows the investor, a damaged property may not have an effect on whether the lender will fund the deal.
- Just like hard money, private money loans are faster to disburse than traditional bank loans
- Again, just like hard money, there would be no repayment penalties if paid back sooner than the due date unless the terms of the loan state otherwise.
Private money – cons
- If the deal goes bad and the investor can’t pay the private money loan back to the lender, there could be bad blood between the two. Especially if they are family or friends. Having a strain on a relationship due to a bad deal, may not be worth it in the end.
So how do you know which type of money loan is right for you? Well, do your research. If you’ve checked your local banks and you can’t seem to get approved for one reason or another, try reaching out to hard money lenders. If you aren’t able to find a hard money lender then think about friends or family who may be willing to help you out.
If you are a part of the real estate investing world then you may already know about Bigger Pockets and the various real estate investing Facebook groups. Both of these are great resources in trying to find answers to any questions you may have. Searching for a hard money lender in these groups or forums could be helpful, but also be wary about who you thinking about partnering with for your deal.
We’ve heard horror stories of investors being cheated with lenders or partners in a different state or even with someone they’ve met in person. Always check the hard money lenders out, look for reviews, and ask for references and past deals they’ve done.
If you have any questions regarding purchasing real estate or private or hard money loans, our Sales Agent, Audra, is the perfect resource for you! Call Audra at 317-785-1909 or email her at audra@crmproperties.net.
Are you searching for a property manager? Don't hesitate and reach out to Chris so you can have peace of mind while building a real state investing career. Contact Chris at 765-227-4488 or email him at chris@crmproperties.net.
CRM Properties is a one-stop-shop for investors wanting to invest in the central Indiana market. We service Indianapolis, Kokomo, Lafayette, and surrounding areas. We complete real estate deals, renovations, property management services, and more. Make CRM Properties be your property management solution.
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