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Hard Money vs. Private Money: Choosing the Best Creative Financing Solution for You

Ann Bellamy
Updated: August 18, 2023 3 min read
Hard Money vs. Private Money: Choosing the Best Creative Financing Solution for You

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 are a few guidelines to understanding hard money vs. private money, keep in mind that practices vary by region.


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 private money lender, such as 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 no 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.

Conclusion

In conclusion, understanding the differences between hard money lenders and private money lenders is essential for anyone navigating the world of real estate financing. Both types of lenders play crucial roles in providing alternative funding solutions, but their nuances can greatly impact your borrowing experience and overall success in your investment ventures.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.