Private Money vs Hard Money 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, who are typically private investors or companies. 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

The first thing that should stand out to you about hard money lenders is 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.

These loans are best fit for investors who are looking for lower loan amounts, want 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.

An Example of a Hard Money Loan

A typical hard money loan has a term of up to 18 months and can provide up to 75% of the property’s purchase price. A typical borrower is a developer or a house flipper who needs the money as soon as possible. They benefit from hard money loans, as their typical closing time is up to two weeks, and the rehabber or developer needs fast access to capital.

The interest rates range between 10% and 18%, depending on the terms. The monthly payment is typically interest-only, so the flipper or developer only focuses on paying the interest. After they construct or rehab the property, they can sell it and repay the loan all at once — any remaining money is considered profit.

Pros of Hard Money Lenders

• Fast close – Because a hard money lender requires less documentation, they can close a loan much faster than traditional lenders, often in less than a week. This is part of the reason that they are often used as a flip loan to buy a distressed property as soon as your real estate agent brings it to your attention.
• Less documentation – Hard money loans are asset-based loans, so they don’t require stringent documentation like a traditional loan.
• Low credit score requirements – Asset-based lenders are often extremely flexible with credit score requirements.

Cons of Hard Money Lenders

• Very high interest rates – A hard money lender charges more interest because the loan terms are so much shorter than for traditional financing. They also typically have a lower loan-to-value ratio, meaning a larger down payment.
• Higher risk of default – You have less time to pay off a short-term loan, so if money stops flowing, you could be at risk of losing your property.
• Balloon payments – Unlike traditional mortgages, it’s common to have interest-only options for hard money loans, which then require the full loan amount to be paid at the end of the loan term.
  

What are Private Money 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. These are formal companies that lend money for real estate investments with their own capital, which isn’t beholden to the same lending laws as a traditional loan. 

Here are some features to consider about a private money lender:

Longer Terms

Unlike a hard money lender, a private lender will usually have terms that are a minimum of 5 years and a maximum of 30 years. This allows you ample time to make your interest payments while developing a strong cash flow.

Higher Interest Rates and LTVs

Private money loans usually have higher mortgage rates and down payments than traditional loans because they are riskier for the private lender, though they are not usually as high as you’d get through a hard money lender. 

More Flexible Loan Requirements

Most private money lenders have established systems to approve loans that will vary slightly from traditional financing, such as not requiring bank statements or basing approval on real estate profitability.

Private lending may allow you to go above loan limits set by traditional lenders, making them a good choice when you have a large real estate project you want to undertake. Their business processes also tend to be more flexible, meaning you can get great deals that are unavailable with a traditional mortgage. 

An Example of a Private Money Loan

A real estate investor wants to purchase a high-producing four-unit investment property that costs $1,500,000. This would typically need to be done through a private money lender because the conforming loan limit for a four-unit property is only $1,474,400 for 2024.

Neither hard money or a traditional loan would work here, thanks to the high cost and the amount of time it would take to pay it back. 

Pros of Private Money Lenders

• Borrow through an LLC – Traditional loans are typically only underwritten for a single person, but you can underwrite a private money loan through a business entity.
• More flexible requirements – A private money lender finds creative ways to identify your ability to pay back the loan that often does not rely on personal income, meaning they are a good choice for those who can’t qualify for a traditional loan based on their income streams.
• Faster approval process – The lack of extensive research into your financial background also means that they can be underwritten faster, letting you purchase your real estate investment when the market is right. 

Cons of Private Money Lenders

• Higher rates and fees – Because these loans are riskier for the lender, they have higher mortgage rates, more fees, and a larger down payment.
• Risk of default – There is also greater risk for you. Any loan collateralized with hard assets means that should you default, that hard asset may be seized.
• Less protections – As private money loans don’t have as strict lending requirements as traditional loans, you also have less recourse if something goes wrong with the lender. This is why it’s critical that you find a reputable lender who specializes in private money loans for your niche. 

Private Money vs. Hard Money 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 rehabbing or developing a property only to sell it later is a good contender for a hard money loan. Funding a fix-and-flip is one of the most common reasons investors look for a hard money lender.

Other cases include purchasing partially completed properties, properties under construction, or properties that would not satisfy traditional lender requirements. Other use cases include lower-value properties, as they typically have a higher DSCR compared to higher-valued properties. 

Bridge-to-construction loans are also common, and so are loans in highly competitive markets where buyers require fast closing times. 

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 the Best Lender

Hard money lenders and private lenders do not have the same terms. Each company sets its own guidelines and provisions, so it’s important to shop around.

Here are some other factors that will help you determine between hard money vs private money options:

• 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 use both hard money and private money sources in their strategies. 

Often, investors implement the BRRRR method, where they buy a distressed investment property, renovate it with hard money, refinance it into private money, rent the property out, and then repeat the entire process. This is a great method for seamlessly transitioning from one real estate deal to the next.

If you need a reliable partner for your private loan needs, you can rely on Visio Lending. We are an experienced mortgage lender specializing in real estate investing — more than 50% of the loans we originate come from repeat customers. Contact us online or call us at 888-521-0353 to discuss a deal. 

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