If you’re seeking creative ways to finance your next investment property, you’ve likely debated hard money vs private money loans. The topics of hard money and private money can be pretty convoluted. It’s even difficult to nail down the definitions.
The reality is there are no hard and fast rules about how the terminology is used. There are popular views that have been proclaimed loudly and repeatedly, making them appear to be the actual answer. However, nothing’s been officially agreed upon. “Hard money” is simply naming a convention for someone who is lending money short-term, usually for a higher interest rate. “Private money” often refers to a family member or friend… but doesn’t have to.
While there’s a few guidelines to understanding hard money vs private money, keep in mind that practices vary by region.
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What is hard money?
Like a traditional mortgage, a hard money loan is a loan collateralized by a hard asset. These assets are tangible, such as real estate, vehicles, equipment, gold, or silver—though it’s often real estate. Therefore, a hard money lender is a lender who uses the value of the underlying real estate to determine the loan amount and rate.
There are very few true hard money lenders left. Most of them ask for FICO scores, tax returns, or other indicators traditionally used by conventional lenders.
So what should you consider when choosing a hard money loan over a conventional loan?
Pros of hard money
- More flexible with less criteria to meet—perfect for buying a distressed flip
- Quicker to receive approval on the loan
- Might not need to have a down payment
Cons of hard money
- Higher fees and interest rates
- Leaves you at risk of losing your property/collateral
What is private money?
On the other hand, there is private money, which is exactly what it sounds like. It’s money lent by a private person or organization for a purchase. As such, terms vary widely. Private money sources can use whatever criteria they’re comfortable with when “qualifying” the person or entity to which they lend. It can be as basic as, “I’ve known you since you were in diapers, so I trust you.”
Before you start searching to find a wealthy relative, you should know the pros and cons of private money loans.
Pros of private money
- Fast approval with more flexibility
- No minimum credit score
- Allows for rehab financing
Cons of private money
- High fees and interest payments
- Shorter payback period
- Possible negative implications on your relationship
Neither hard money nor private lenders are restricted by banking regulations because they are non-institutional. But both institutional and non-institutional lenders must comply with all lending laws, so there is not a free pass for hard money or private lenders.
Examples of private money vs. hard money
Let’s consider two clear-cut cases.
Case 1: Your grandma believes in you and wants to lend you money for a down payment. She would never lend to anyone else and won’t charge you much. She’s clearly a private lender.
Case 2: A company or person advertising as a hard money lender is clearly a hard money lender. There shouldn’t be any confusion.
Now let’s look at two not-so-clear-cut examples.
Case 1: Your dentist has known you for years and has several real estate investments himself. He has lent money to one other client, also a real estate investor, and is willing to fund your deal. He doesn’t want you advertising his services to others though. He’s a private lender—not available to the general public.
Case 2: Take that same dentist, but now his real estate attorney broker is lending deals to him. He wants more clients and wants you to spread the word. He would be considered a hard money lender since his pool of borrowers could be anyone who meets his criteria, not just friends and family.
More on other people’s money from BiggerPockets
Is it hard money or private money?
By looking at these two factors, you can determine if someone is a hard money lender or private lender.
- Rates and terms: If rates and terms are similar to other hard money lenders, consider them a hard money lender. If not, they’re likely a private money lender.
- Advertising: If they advertise, or stand up at a real estate group and announce they lend, consider them a hard money lender. If they don’t advertise or want you to promote their services, they’re likely a private money lender
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 today’s common usage, a hard money lender advertises their services, has a process for qualifying loan applicants, and is available to any borrower meeting the established criteria. A private lender, on the other hand, is someone you know who doesn’t lend to the general public and may charge less than the local going rate.
Don’t be misled by hard money lenders calling themselves private lenders just to sound cheaper or less scary. One can call themselves the president of the United States, but that doesn’t make it so. Evaluate each lender based on your needs, their reputation, and their ability to deliver on what they say.