Hard Money vs. Private Money – And Why Do I Need It?
The investor world is full of terms, acronyms, and slangs, and they aren’t always easy to decipher. These terms are thrown around and can be misconstrued. Over time these words get bent and reshaped to mean multiple things – kind of like the game telephone we played as kids.
A big example is the blanket term Hard Money Financing. Over the last few years, hard money has become the catchall term when there are any funds that bridge the gap from the purchase of a destressed property, rehabbing to value. This type of loan allows you to rehab and rebuild the value to meet properties in the area through an appraisal. Once value is returned, there is an opportunity to flip it or even refinance into a long-term loan.
The term Hard Money comes from the collateral of the loan being a “hard” asset, which is, you guessed it, the property. These are short-term high interest loans, think 6-24 months and double-digit rates.
Recently the term Private Money has gained popularity and from the surface there is truly little difference in Private and Hard Money Financing. Asset based, high interest, short-term loans.
What Is The Difference Between Hard Money and Private Money
Let’s dig a little deeper and investigate the tangible difference between the two. This all starts and ends with how/where the funds are coming from.
Hard Money – This is traditionally from a bank line of credit or a hedge fund loan group. The funds that come from a company who is in the business of lending. When funds come from a bank line of credit or hedge fund there tend to be additional requirements (i.e. lender fees, appraisals, draw fees, pay off fees, wire fees).
Private Money – Think of a rich uncle or family member, and/or raising the funds through a private source. The flexibility can be much greater to fit any business model.
But why would I do this type of lending? I have the money to pay cash and save all the trouble… These are truly relevant questions, and like all things in investing, the answers depend on your particular business model. If it’s to dump large amounts of your hard earned cash into property and have it yield only the month’s rent (appreciation over many, many years) or wait for it to sell on a flip, then yes this isn’t for you.
If you want to do this for a living or to supplement your income, you probably have considered this already and here is why.
6 Reasons To Use Private Money:
- Speed – close in a week or less, unlike traditional products
- Leverage – use your money to borrow other people’s money
- Protection – if you are concerned if the deal is good or not, the lender will likely help you determine if this is a smart move or not, based on whether or not they will lend to you
- Property Qualification – property is distressed and needs repair
- Borrower’s Qualification – average credit, lower assets, common sense lending
- Utilize Equity – traditional 20% down regardless, HML works off ARV… saving money.
So What Does This Mean?
It’s worth noting that these different items may vary from lender to lender. When interviewing a specific lender, be sure to ask them how they get their funds to lend. Explore to find out but most likely if they are charging you the fees after closing then they are dealing with a bank and those are overlays. See my “The Draw Process, the single most important factor associated with a hard money/private money loan?” to help discover other ways to get the answers needed to be successful.
Either way, the team at Blink will ensure that are successful by fully grasping and understanding your business model. Our team will help you develop relationships in the industry and guide you on what questions to ask them, like who they use.
Call the Blink Investment team for more information. Whether you are just getting started in Houston Real Estate Investing, or you’re looking to expand your profitable portfolio. Our team of investor and mortgage experts can help you in a Blink.
