With the real estate industry experiencing growth in the aftermath of the COVID-19 Pandemic, investors are once again looking for the best financing opportunities. The nature of real estate is such that different entities associated with the ecosystem have diverse finance requirements.
This means that while traditional lending institutions like banks can be perfect for homebuyers, they are not a great fit for investors looking to fix and flip properties. The latter requires a more personalized and dynamic approach to financing, which banks are unable to help with.
If you are a real estate investor or are looking to enter this profitable industry, you might have come across two terms- Hard Money Loans and Lenders and Private Money Loans and Lenders. Investors usually try out one or the other forms according to what suits them best.
In this resource article, we are going to understand what hard money and private money lenders are all about. Specifically, we are going to look at the major differences between the two lending types.
Hard Money Loans and Lenders: Definition
In very simple words, hard money loans are offered by non-traditional financial institutions against an asset. This means that when you secure the loan, you are doing so by placing an asset, often a real estate property, and its value.
Typically, hard money loans are disbursed for shorter periods like between six months to two years. This is why they are perfect for real estate investors that are looking to buy a property, renovate the same and then sell it within a short span.
Since the disbursal process is easy, hard money lenders tend to charge a higher rate of interest on the loans. The risks are higher and this is why traditional financial institutions do not want to be a part of this ecosystem. The higher interest rates and shorter durations are for investors.
Private Money Loans and Lenders: Definition
As the name suggests, private money in almost all cases is an individual or a small organization. as opposed to hard money lenders, private money lenders offer greater flexibility and diverse rates of interest according to the individual needs and requirements of the investors.
Private money loans do not involve checking the credit score. This means that even as a real estate investor, you have undocumented income, they are not going to turn you down. The paperwork is simple and can be even carried out within a single day.
Like hard money lenders, you get shorter periods for loan repayment with higher rates of interest. Many are drawn to private money lenders simply because they afford higher flexibility. Anybody with some surplus cash on their hands can become a private money lender.
Differences Between Hard Money and Private Lenders and Loans
In this section, we are going to outline the major differences that exist between the two lending types in real estate investments-
1. Official and Formal Process-
Hard money lenders and institutions have some set practices and principles when it comes to lending for real estate investments. This means that you cannot negotiate with them in terms of the loan repayment period, interest rates, and the type of collateral on offer. Private money lenders make up their own rules. They might charge a different interest rate from two individuals looking at the same sum of money for a real estate project or investment.
2. Availability and Presence-
You might have seen institutions that offer hard money loans advertise themselves on highways, as well as on digital platforms. This makes it easier for customers to get in touch with them. A private lender on the other hand, does not advertise its activities. You will get to know them majorly through word-of-mouth publicity. This makes it difficult for anyone to spot them and request their services. This makes hard money lenders more accessible.
3. Licensing and Procedures-
Most hard money lenders, especially the most reputable and credible ones are licensed. This means that they are a formal part of the structure. While this makes them credible in some senses, it also serves to make the process more procedure-oriented. This means that they are going to carry out all the procedures to see whether you are a good fit or not. as against this, private money lenders do not have any licensing or procedures when it comes to giving out loans.
The Bottom Line
It should be pointed out that both hard money, as well as private lenders, have become major players in the real estate investing scene. They have been able to become strong entities because of the failures and inadequacies of traditional financial institutions like formal banks. Real estate investors looking for a quick flip find it best to take help from both these entities. If you have any specific questions regarding either hard money or private lenders, please let us know in the comments below. We will try our best to address the same to the best of our abilities.