In 2018, 5.96 million houses were put up for sale in the United States alone. The real estate market is still alive but requires a high initial investment that not everyone can afford.
Private money and hard money loans are two of the most common methods investors use to purchase and/or flip a property.
These loans have so much in common that they’re often confused. Investors and lenders must be able to distinguish between them to know what they’re getting into and how to get and/or give money in a way that best suits their needs.
Read on to learn the differences between hard and private money loans to determine the best one for you.
What Is Private Money?
A private money loan is a sum of money provided by an individual or an organization known as a private money lender. They’re often the friends or family of the borrower, which is why they’re also known as relationship-based lenders.
There are three main types of private money lenders to choose from. Family or friends are known as primary circle lenders, acquaintances are second circle lenders, and accredited lenders and investors are third party circle lenders.
A private money lender doesn’t have to be licensed, but they must follow all the banking laws in their state.
In private money loans, real estate is used as collateral in place of a down payment. The average private money lender gives its borrowers up to 70% of the property’s after-repair value.
You may want to consider a private money loan if you’re a real estate investor hoping to expand your portfolio or have a great deal of money to put up from a trust fund, retirement account, or savings account.
What is Hard Money?
A hard money loan is a sum of money that you take out against real estate property you own or are in the process of buying. It’s provided in the short term, usually for 12 months with the possibility of a 2-5 year extension. Instead of borrowing from an individual, you’re borrowing from a lending institution.
To get a hard money loan, you must agree with the lender to make payments for the entire term of the loan. These payments cover interest only payment, but at the end of the loan term, you’ll either have to have the property sold and loan paid, or have the property refinance, specially if you would like to keep it as a rental or long term.
Hard money lenders could lend up to 90% or even 100% of the purchase price and 100% of the rehab cost. The qualification for these loans is usually an After Repair Value (ARV) and it various depending on the hard money source.
Hard money lenders must lend to an entity such as an LLC or Corporation depending on the State the property is located.
Certain borrowers will benefit the most from hard money loans. They’re ideal for real estate investors looking to buy a run-down property to stabilize and/or flip.
Pros and Cons
Even the most beneficial loan presents a level of risk. Knowing the dangers ahead of time makes you a prepared lender and/or borrower.
Both Private Money Loans and Hard Money Loans provide several benefits. They’re one of the fastest ways to get money, which can take up to 45 days with traditional lenders. They usually can close as fast as 5 days.
One reason for this increased speed, is that private and hard money loans require less paperwork than their traditional counterparts. A purchase contract, entity documents, signed trust deed and promissory note are usually enough.
A private money lender typically looks more at future profitability than present conditions. Borrowers with poor credit can still get a loan if they have enough equity.
Private loan providers are transparent about their rates and costs. They’ll let you know what you’re getting into ahead of time because they want to ensure the profitability of their investment.
Hard money loans also have several benefits. They only take a few days or a couple of weeks to get approved compared to 30 or more days for a traditional mortgage.
Hard money loans give borrowers more money overall, because they require little to no down payment and allow them to take out up to 90% or even 100% of the property’s purchase price.
For more benefits, see more reasons to use hard money for real estate investments.
Private loans have several disadvantages. They cost more than traditional loans due to higher interest rates and points that can add extra fees.
Private loans also have stricter payment time frames. This makes them ideal for quickly buying and flipping properties.
Hard money loans also have disadvantages. They have high rates and origination fees that rise if you don’t meet payments.
Hard money loans also leave a borrower at risk of losing their property. As the guarantor of the loan, the property used as collateral belongs to the lender for the term of the loan. This gives them the right to sell it if you don’t repay within the loan term period.
Differences Between Private and Hard Money
The primary difference between private money and hard money is the type of lenders that give them out.
Hard money loans come from companies or institutions. A private money lender can be almost anyone, and they don’t have to be licensed or follow the same standardization methods.
Hard money terms are stricter because the lenders are semi-institutional. They’re usually a group of licensed people or a company.
Hard money loans cover renovation and purchase costs, and most private money usually lend less percentage and much less for rehab costs.
Where to Get Hard or Private Money Loans
Private money and hard money loans both allow for quick, short-term cash to use for real estate investment.
A private money lender is usually an individual the borrower knows. Hard money lenders are institutions and companies with less flexible terms but provide more trust and coverage.
Do your research before choosing a loan or lender. Find out who provides the best rates and terms.