Hard money and private money have a hazy line between them. Many investors think they are identical. Despite some of their commonalities, there are several significant variances that borrowers should be aware of.
What distinguishes private money from hard money, then? And who should you choose as your lender? In this article, we'll provide answers to these queries as well as a comparison of the two.
What is Hard Money?
A hard money loan is obtained through a "hard asset," with real estate being one of the most popular assets. So, a hard money lender is a lender who bases the loan amount and interest rate on the asset's value.
What is Private Money?
A private person, group, or organization lends private funds. As a result, the terms can differ significantly amongst lenders. When determining whether or not to lend to a person or corporation, private lenders are free to employ any criterion they are comfortable with.
What do Private and Hard Money Lenders Have in Common?
These two potential lenders only have one thing in common: neither of them is constrained in the same way that a conventional lending institution is.
This has several advantages for real estate investors:
– It takes less time since you don't have to go through as many hoops to get private or hard money. In some cases, your loan might be granted in less than a week.
– No credit check is necessary - To qualify for traditional funding, your credit rating must meet specific requirements. But with hard and private lenders, it's different.
– Allow for liquidity because doing so will enable you to leverage your funds and maintain greater liquidity (OPM). Additionally, spreading the risk out rather than taking it all on yourself helps us.
– It has a lot more flexibility. Hard money loans don't have a prepayment penalty, although private lenders are far more flexible with their lending terms. These are just a few examples of how these two loans offer greater flexibility than more conventional forms of finance.
Private Money: Pros and Cons
You may have observed that a private money lender can be anything, thus the definition is quite broad. Anyone with spare cash or a stake in your real estate investment could be hired as a private money lender if they adhere to all lending regulations.
The money borrowers get from a private lender typically goes toward the purchase price and refurbishment of a property, much like hard money loans. Additionally, the lender often receives both the mortgage and promissory note at closing as an insurance policy. The lender will be paid their principal amount plus interest following the rehabilitation and eventual sale.
What rate of interest levies the private money lender? According to the type of lender they are, obviously.
Let's think about these two distinct lending categories:
- Your uncle wants to borrow money from you to help with the down payment and renovations since he trusts you. He won't lend to anyone else and will collect a minimal fee. His interest rate will therefore be fairly modest.
- Six properties are owned by his long-time friend. He wants to finance your project since he previously lent money to another friend who is a real estate investor. He still qualifies as a private lender even though he does not market his services. He might, however, charge a greater interest rate than your uncle.
You can see how flexible private money loans are. Private loans, on the other hand, can be argued to put both the lender and borrower in precarious situations.
Consider the scenario when both parties are novices in real estate investing. Despite their lack of expertise, they care about one another and wish to support one another. If the investment doesn't succeed, this can cause resentment between the two.
Furthermore, private lending is less regulated than hard money loans (and in certain situations, it's not regulated at all), even though it must still meet certain requirements. Therefore, if you choose to go this path, be sure to perform extensive research on the rates and background of the private lender. Additionally, if you're a novice investor, consider your exit strategy carefully before making a decision.
Hard Money: Pros and Cons
Hard money lenders are a great way for seasoned investors to supplement their private funding sources.
What are the advantages of using a hard money lender, then? They are more organized and semi-institutional than a private lender. Above all else, though, they have permission to lend to real estate investors. As a result, they frequently have more expertise than the average private money lender in fix-and-flip projects.
One aspect of hard money loans that separates them from private loans is regulation, which could be considered a little disadvantageous. Compared to private lenders, hard money lenders must pass through more hoops (but significantly less than traditional financing). Depending on your perspective, this could also be a strength. It is the reason why hard money lenders are the safer choice of the two for a first-time investment and why investors keep choosing this.
Private Money vs Hard Money – What’s the Verdict?
Hard money and private money might be difficult to distinguish from one another. As you can see, they both have slightly distinct advantages and disadvantages.
Choosing which is best for you should be done investment by investment. However, compared to your typical private lender or Uncle Remus, hard money loans do provide a level of security and industry expertise. Therefore, it would be worthwhile to ask for a hard money loan unless you and your private lender have experience and confidence in real estate investment.
We are experiencing historical developments on a global and domestic scale, including the virus's major socioeconomic effects on New York City.
The concept of living and working in a city that never sleeps is what makes this area a hotspot for real estate transactions.
This social-cultural revolt caused by the virus epidemic has left previously happy urbanites weary of being cramped in overpriced New York City homes when the reality has started to sink in that they no longer have to accept these hardships only to get closer to the workplace or classroom.
Surprisingly, there are thousands of square miles of available land in New York City's immediate proximity, however, it seems that it took a worldwide pandemic for citizens to note.
The real estate sector in New York's suburbs has expanded exponentially, especially in the up-and-coming markets sprouting up in Rockland County, Westchester, the North and South Shores of Long Island, and throughout New Jersey.
The transactional operation is completely out of control and has surpassed almost all of the industry's top insiders' original predictions.
We Hope reading these three tips and tricks have helped you.
Seek affordable services from Caroline J. Smith & Associates, P.C., one of Chicago's top real estate law firms.
Hard money lending is also sometimes called private lending, equity lending, or trust deed investing.
The most common asset being real estate, of course Hard Money Lending.This is a brief overview but hard money lending is distinguished from conventional lending in the following way:Conventional (bank) loans are what I call cash flow lending.
For a residential borrower this means your credit history, and income level and stability is all important.
The single most important factor is the collateral itself: how much is the property realistically worth and how much equity cushion does it provide to protect the loan.
The lender's primary concern is, if the borrower defaults and he has to foreclose, can he quickly and easily dump the property and recover all of his principal and (hopefully) interest and fees.The second critical factor in hard money underwriting is exit strategy, or how will the borrower repay the loan at the end of the term.
Since most of these loans are short-term--1 to 5 years--there has to be a clear and plausible strategy for repayment.Below these factors comes the borrower's credit worthiness: ability and willingness to make monthly loan payments.
