Hard Money Lender vs Private Money Lender

Why is it important to talk about the difference between a Hard Money Lender and Private Money Lender? The difference can often be unclear. The complication is that this term, for the most part, is not standardized, and people call themselves what they want to. According to Wikipedia, a “Hard Money Loan” is defined by the asset-based nature of the financing, and is secured by real property. It’s important to understand the distinctions between Hard Money Lenders and Private Lenders because the difference can affect your bottom line.

Hard Money Lenders

Most Real Estate Investors are taught that it’s the “hard” terms that define a Hard Money Lender. What is important to realize, however, is that most people calling themselves “Hard Money Lenders” are actually “Hard Money Brokers.” The distinction is important, since a “Broker” is a person who buys and sells assets for other people. The reason most Hard Money Brokers call themselves lenders is mainly for marketing purposes, since the term “Broker” has acquired some stigma following the housing market crash. The benefit of Hard Money Brokers is that they are usually licensed, up-to-date with all pertinent laws and procedures, have access to many different lenders, and can offer multiple types of financing options depending on the borrower’s situation. The downside to using a Hard Money Broker is that you are not negotiating directly with the lender, who makes the rules.

Private Lenders

Most Real Estate Investors refer to “Private Lenders” as family and friends that will lend money at lower rates than Hard Money, or will take a share of the profits. Again, the terms of the loan are not the distinguishing characteristics of a Private Lender; rather, it is more about WHO is lending the money. The important thing to note is that the term “Private Lender” simply refers to a private individual or company that is lending money, which encompasses private companies, friends and family, peer to peer lending, and other creative scenarios that private entities may think of. The benefit to using Private Money Lenders is that you are negotiating directly with the decision makers because they are lending their own money. Private Lenders can be as creative and flexible with terms and financing options as our personality, experience level, and creativity allow. The downside to using Private Lenders is that every Private Lender is different. Each may use different valuation methods for underwriting, plus the level of investment knowledge from one Private Money Investor to another is vastly different. For this reason, it’s important to get to know each of your Private Lenders individually.

“Hard Money” refers to the type of loan that is asset-based and secured by real property. Many Hard Money Brokers call themselves Hard Money Lenders. These brokers have private and corporate investors for whom they lend money to Real Estate Investors. Those Private Lenders make the rules because they are lending their own money.

As a Real Estate Investor, it’s best to diversify your financing options and have a network that includes both Hard Money Brokers and Private Lenders, because the more financing options you create, the more money you can make.