If you’re looking for creative ways to fund your next investment property, you’ve probably been discussing hard money and personal money. The subjects of hard money and personal money can be quite confusing. In fact, it’s difficult to pin down the definitions.
The reality is that there are no hard and fast rules for using the terminology. There are popular views that have been proclaimed loudly and repeatedly that seem like the real answer. However, nothing was officially agreed. “Hard money” simply means a convention for someone to borrow short term money, usually at a higher interest rate. “Personal money” often refers to a family member or friend … but doesn’t have to.
While there are some guidelines for understanding hard money versus private money, keep in mind that practices vary by region.
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One of the most frequently asked questions on the Advance Guide forums is, “How can I invest in real estate with no money and bad credit?” The answer? They should not. You need to get your situation in order and invest from a position of financial strength.
What is hard money
Like a traditional mortgage, a hard cash loan is a loan that is secured by a hard asset. These assets are tangible, like real estate, vehicles, equipment, gold, or silver – although they are often real estate. Hence, a hard money lender is a lender who uses the value of the underlying property to determine the loan amount and interest rate.
There are very few real hard money lenders left. Most of them ask about FICO scores, tax returns, or other indicators traditionally used by traditional lenders.
So what should you keep in mind when you opt for a hard cash loan over a conventional loan?
Benefits of hard money
- More flexible with fewer criteria to meet – perfect for purchasing a distressed flip
- Faster to loan approval
- A deposit may not be required
Cons of hard money
- Higher fees and interest
- Leaves you at risk of losing your property / collateral
What is private money?
On the other hand, there is private money, and that’s exactly what it sounds like. It is money borrowed from an individual or an organization for a purchase. Therefore, the terms vary greatly. Private sources of money can use whatever criteria they are satisfied with in “qualifying” the person or entity to whom they are lending. It can be as simple as, “I’ve known you since you started wearing diapers, so I trust you.”
Before you go in search of a wealthy relative, you should understand the advantages and disadvantages of personal money loans.
Benefits of private money
- Fast approval with more flexibility
- No minimum creditworthiness
- Allows rehab funding
Disadvantages of private money
- High fees and interest payments
- Shorter payback period
- Possible negative impact on your relationship
Neither hard money nor private lenders are restricted by banking regulations because they are not institutional. But both institutional and non-institutional lenders must comply with all lending laws, so there is no hard money or private lender free pass.
Examples of private money vs. hard money
Let us consider two clear cases.
case 1: Your grandma believes in you and wants to lend you money for a down payment. They would never lend money to anyone else and they won’t charge you much. She is clearly a private lender.
Case 2: A company or person who advertises as a hard money lender is clear a tough moneylender. There should be no confusion.
Now let’s look at two not-so-clear examples.
case 1: Your dentist has known you for years and has made several real estate investments himself. He has loaned money to another client, also a real estate investor, and is ready to fund your deal. However, he doesn’t want you to promote his services to others. He is a private lender – not available to the general public.
Case 2: Take the same dentist, but now his real estate agent is lending him business. He wants more customers and wants you to spread the word. He would be viewed as a tough moneylender as his pool of borrowers could be anyone who meets his criteria, not just friends and family.
Find out more about other people’s money from Advance Guide
Is it hard money or private money?
By looking at these two factors, you can determine whether someone is a hard cash or a private lender.
- Prices and conditions: If rates and terms are similar to other hard money lenders, consider them hard money lenders. If not, it is likely a private moneylender.
- advertising: If they advertise or appear on a real estate group and announce that they are making loans, consider them tough financiers. If they don’t advertise or want you to promote their services, they are likely a private moneylender
However, there is no hard and fast definition of a private lender versus a hard money lender. In fact, any non-institutional lender can call themselves a “private lender” – that is, if they choose to be defined as “non-institutional”.
But in common usage today, a hard money lender advertises their services, has a qualified loan applicant process, and is available to any borrower who meets the set criteria. A private lender, on the other hand, is someone you know who doesn’t make public credit and may charge less than the local rate.
Don’t be fooled by tough financiers calling themselves private lenders just to sound cheaper or less scary. You can call yourself President of the United States, but that doesn’t make it that much. Rate each lender based on your needs, reputation, and ability to deliver what they say.