If you’re a real estate investor or small commercial property owner, chances are that you’ve heard about hard money loans and private money loans. Both forms of lending are typically simple debt structures for acquisition or refinance, but they are different in several key ways. In this article, we’ll explore the differences between hard money and private money loans so that you can decide which will work better for your needs.
The Difference Between a Hard Money Loan and a Private Money Loan
One thing to keep in mind is that hard money and private money loans are not the same thing. In fact, they’re actually quite different.
Hard money loans are short-term, typically lasting between 3-12 months and can be used for any number of purposes including rehabs, flips, land acquisition or acquisition/construction loans.
Private money loans usually have a longer repayment period (1-5 years), but have lower interest rates and fees due to their personal nature. True private money loans are also not as widely available as hard money and traditional bank loans, since private lenders tend to make fewer loans, for longer terms.
Local Private Money and Hard Money Lenders
Local private money lenders can be a great option if you have a relationship or a “local” deal that requires some insight into the market, whereas national hard money lenders are easy to identify, lend across a wide range of properties and markets, and tend to be more comfortable with the risks associated with larger dollar transaction or more complex projects.
Local Private Money Lenders
If you’re just getting started as a real estate investor, it can be difficult to find people who are willing to lend you their money in the early stages. Most will want to know that you are capable of making the deal work and paying off their loan when the time comes. The good news is that there are plenty of local private investors out there who are seeking to lend their funds and earn a healthy return—and they may even be able to help you grow as an investor in other ways, since most find their way to private lending through their own real estate investing journey.
National Hard Money Lenders
If none of your friends, family, or acquaintances fit the bill for what we’ve outlined above as ideal candidates for lending their own capital directly, then it might make sense for an investor to contact an institutional hard money or private money lender to determine their lending criteria, which is often asset based and rely almost exclusively on the quality, value, and condition of the property, and intended purpose of the transaction.
When you’re looking for a hard money or private money loan, you will have the option to choose between local and national private lenders.
There are pros and cons to each type of lender. Local private lenders tend to know their market and can work with investors who aren’t necessarily accredited as long as they are able to prove they can repay their loans, whether via successfully refinancing at loan maturity, or exiting the loan via a sale, in the case of a flip or reposition. On the other hand, national private lenders may be able to lend larger amounts of money than local ones, but may have stricter requirements for borrowers or require more collateral or equity in assets.