Should I use Private Money or Hard Money for my next deal?
Its important to know the difference between all funding sources and to have access to all of them. There will be a time when you need to use each of the following types of funding sources— private money, hard money, your own money, banks and self-directed IRAs. Each capital source is important and by having access to each it will ensure you do not miss out on an opportunity because you don’t have the money.
I know a lot of investors who only will use private money. The money can certainly be cheaper and you can usually get your private investor to give you a good portion of the entire transaction so you don’t need any of your own money in the deal. If you have a private money lender who is easy to deal with and has the capacity to fund ALL of your deals, you should go that route.
However, don’t put all your eggs in one basket. Don’t do all your deals with one private lender because if they stop lending or run out of money, you’re out of business. It will take time and resources to find new funding sources will miss out on opportunities.
When you are working with a private lender, make sure it’s the right private lender. I know a lot of private lenders who are hard to deal with—they want updates on a regular basis and want to micromanage the project. Obviously you need to set proper expectations for them, but there are certain personality types that you should avoid in a private investor. It’s too challenging to have someone who is going to be asking you questions everyday.
Having raised private capital for many years, for our flips and for our hard money lending company, we are familiar with all the different personality types. Make sure you understand the pros and cons of private lenders. Also, keep in mind, the difference between a private lender and a hard money lender is only a few thousand dollars, and with a hard money lender, you will have a lot more flexibility, and a lot less micromanaging.
Make sure you know when to use private money, when to use hard money and when to use other money sources. There is always a time and place for all of them and you will need all different types of funding sources for different projects. We’ve done loans for borrowers that do 100 properties a year. They’re bankable, they have private money, they have their own cash, but they also use hard money lenders because there are certain instances that they need it.
Don’t miss out on an opportunity because you don’t have the money. You’re a real estate investor; spend time on finding deals first. After you have enough deals coming in, then start spending some time on negotiating better capital sources.