Hard Money Lenders vs. Private Lenders

Nowadays there are so many lenders positioning themselves as the best fit for investors. So how do you know who to choose and which is really the best fit for you?

Hard money lenders and private/direct lenders market themselves in similar ways, making it difficult for borrowers to depict who's who. There are, however, some key differences between private money loans and hard money loans. Let's take a closer look.

What are Hard Money Lenders?

Let's start with hard money lenders and how you can easily pick them out from a crowd. While there is no exact definition of a "hard money lender," there are some common loan terms and features to look to take note of:

Short-Term Loans

First thing that should stand out to you about hard money lenders are are their extremely short terms. Hard money lenders typically offer terms anywhere from 6 months to 24 months. You might ask yourself how one is supposed to pay back a loan in that amount of time? Well, these loans tend to be best fit for investors who are looking for lower loan amounts, wanting a higher LTV and are making a purchase on a subject property that may need rehabbing. Hard money loans could be ideal for rehabbing because you can easily find a lender who will finance the purchase amount and rehab funds consolidated into one loan.

Higher Interest Rates and Fees

Due to the short terms of their loans, hard money lenders need to charge higher interest rates and high fees in order to cover the cost of the loan and make a reasonable profit. Hard money loans are also more expensive because they are seen as riskier investments. 

More Flexible Loan Terms and Qualifications

There are certain criteria such as minimum credit score and appraisal requirements that hard money lenders are more flexible on. While most hard money lenders will, in fact, look at your credit history, they are mostly interested in the real estate used as collateral for the hard money loan.

Here's an example of when hard money lenders could be your best fit:

An investor who's interested in low value properties (think anything lower than $75,000) and investors who have portfolios of lower valued properties.

You're probably thinking “why would you want low valued properties?” These properties can be of low value and still bring in an adequate cash-flow. What may even surprise you more is that the cash-flow ratio is typically greater on a per month basis in comparison to higher valued properties. You will also want to keep in mind that these subject properties of lower value don't appreciate as fast as middle-class properties, however they are extremely stable and can have a steady occupancy rate.

What are Private Lenders?

Now onto private lenders. A private lender is either a business or an individual (such as a friend, family member, or any private person) that loan money but are not part of a bank or affiliated with a government agency. Private money loans include personal loans, business loans, and real estate loans.

For the purposes of this blog post, we will focus on real estate private lenders.

Comparing Hard Money and Private Lenders

Like hard money loans, private loans offer borrowers more flexibility than traditional loans. Both lender types also likely have a higher interest rate and higher down payment requirement than a conventional loan. Another similarity is that both private loans and hard money loans tend to help real estate investors grow their portfolios.

So, what are some major differences? To start, private lenders offer long-term loans, which are great for a long-term investment. Hard money lenders fund deals for up to 24 months, so real estate investors need an exit strategy before getting a hard money loan. Another key difference is private lenders usually do not fund any construction projects, and hard money lenders usually focus on construction.

To further grasp the differences between hard money and private lenders, let's take a look at some of the use cases. Savvy investors will use both loan types as a creative financing solution to renovate and then rent out a property.

Hard Money Use Cases
An investor who's interested in low value properties (think anything lower than $75,000) and investors who have portfolios of lower valued properties are good contenders for hard money loans.

If you're wondering why some real estate investors are interested in lower valued properties it is because they can still bring in an adequate cash flow. What may even surprise you more is that the DSCR ratio is typically greater on a per month basis in comparison to higher valued properties. It is important to note that these subject properties of lower value don't appreciate as fast as middle-class properties, however they are extremely stable and can have a steady occupancy rate at a lower purchase price.

Private Money Use Cases

A real estate investor who is looking to build their rental portfolio of higher valued properties that accrue equity faster is a good candidate for private money. Private money lenders are also your best bet if you are more interested in the long-term value on a subject property. The 30- year terms that private money lenders offer are great for long-term real estate investing.

Things to keep in mind when shopping for your best lender:

• Both hard money lenders and private lenders do not have the same terms. Each company sets their own guidelines and provisions for how they think their investors will benefit the most.
• Depending on your investment strategy, the phase of the subject property will help you determine which type of lender is best.
• Other factors that will help you determine which is best route to go:
  • Property Condition
  • Goals for the Subject Property
  • Amount of Money Available to You
  • Your FICO Score
  • Rehab Timeline
  • Real Estate Investing Experience

Refinance Your Hard Money Loans with a Private Money Lender

As we mentioned earlier, savvy real estate investors will use both hard money and private money sources in their real estate investment strategies. Often, investors will implement the BRRRR method, where they buy a distressed investment property, renovate it with hard money, refinance into private money, rent the property out, and then repeat the entire process. This is a great method to seamlessly go from one real estate deal to the next deal. If you bring in traditional loans, you have to jump through more hoops and often borrowers won't even qualify. 

Interested in partnering with an experienced private lender? Contact us.