Private/hard money difference?

Question

I know the difference between private and hard money, but when I go to search lenders, a lot of them advertise as “private/hard money loans available” or something like that. I’m interpreting it as they consider it the same thing.

My original plan was to buy the house with hard money with a down payment using private money to then later refinance with a conventional mortgage, Classic BRRRR using other peoples money basically.

Joe Villeneuve · Answer

All squares are rectangles, but not all rectangles are squares

Chris Levarek · Answer

@Jacob Mistric Sometimes lenders including hard money might ask for some proof of funds. This requires having the private money lent first, place into the bank account behind the LLC which will be acquiring the funds from the Hard Money Lender. Which leads into the next point, most hard money lenders want a EIN of LLC for funding. So you need a LLC.

Still everything is negotiable with the right lender. If you aren't getting the answers you want, call around.

Ben Stoodley · Answer

@Jonathan Pavkov “gap investing” is a term used frequently describing the financing of your down payment and holding costs (basically everything that your senior debt lender isn’t financing).

Gap investors can be individuals (best) or companies. The key here is to work with individuals that will not require a 2nd trust deed / mortgage behind your senior debt lenders first position loan. MOST will not like to have a second, some may not care but will likely cap the combined 1 and 2 position LTVs.

In summary - I would find a capital partner that will invest enough money into your biz for your next project or two. Create an agreement with them right in your Operating Agreement or By Laws, outlining their investment and returns along with your responsibility (manage the deal). This is the cleanest way. No 2nds. Just an equity partner. Then you can just find good lenders to work with and scale smartly. Too much debt is not a good thing. Capital and experience go a long way.

Good luck!

Joe Villeneuve · Answer

Private money can be anything from an individual you know or don't know, to a group or company.

HML can be anything from an individual you know or don't know, to a group or company.

A HML is just a form of Private Money.

Jonathan Pavkov · Answer

@Ben Stoodley Can you explain a bit more about what you mean by gap investing?

Ben Stoodley · Answer

@Jacob Mistric funding the down payment and holding costs with private money is best done if you can get the private funds deposited into your LLC/Corp biz bank account prior to close. Have a JV agreement and/or bring them into your entity’s operating agreement/by laws. This way, their money is protected - assuming you have the right language in the JV/OpAg/bylaws - and they don’t NEED a 2nd position lien on title.

These 2nd position liens is what most HMLs frown upon. However most don’t care if you have a large sum of money deposited into your account from a partner.

Talk to your CPA and attorney about the right wording. I personally prefer this method of gap investing better than a second position lien anyways.

Michael Glist · Answer

So as mentioned most private lenders will be individuals and hard money lenders will be institutions set up typically as a fund. The reason a lot of lenders will say private/hard money is because they are funding everything with private individuals money as opposed to bank money, lines of credit or hedge fund money. But generally speaking private money would be an individual and hard money a company.

Also you may run into issues with the financing part if you are using private money to fund the down payment. That is not saying it cannot be done since it can and has been. But you will want to talk to the lender upfront about their requirements on you having your personal funds in the deal, a 2nd position lien or if there are any additional requirements or documents they need if you are using private money. You will also want to account for holding costs such as your monthly interest only payments, if you need to front money for rehab while you wait on draws, if you need to have funds to purchase materials upfront, utilities, insurance etc.

Michael Kinsella · Answer

Hi @Jacob Mistric,

Oftentimes a "private lender" will mean an individual who is lending you money as opposed to a "hard money lender" which is generally a fund that is set up for the express purpose of originating hard money loans.

You will likely run into problems with the first part of this strategy, because most HMLs stipulate that they are the 1st and only lien. Additionally, most HMLs will want you to bring some equity to the table.

Hope this helps,Michael

Private/hard money difference?

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