The market is up! And so is the number of lenders out there looking to do business with Real Estate investors. Seems like everyday I am hearing about a new lender and thinking ‘who is that’? Not too long ago, I could count the hard money people in Atlanta on a couple of hands.
What has muddied the waters though is this idea of Private Lending vs Hard Money Lending. There are what seems to be more and more Hard Money Lenders calling themselves private money when in fact they are definitely not that. While there is some ebbing and flowing within the two categories, I thought I would share a write up on the differences between the two as there is more than you may realize. Here we go in no particular order of importance:
| Hard Money | Private Money | |
| Type of Lending | Lending on the asset but almost equal if not more due diligence on the borrower | Lending primarily on the asset and they put their trust in you |
| Purchase/refi or both | Purchase yes – not all do refinances | Both is fine |
| Interest rates | 10-18% typically | Whatever you negotiate but usually comparable |
| Points | ||
| When are points paid | 1-5 is typical | Usually none |
| Term | Usually up front, sometimes on payoff (might be an upcharge) | If any, usually at payoff |
| Down payment | Typically 6-12 months | 6-24 is typical |
| Loan Amount | Typically 10-20% | Can be 0-20% (100% financing is not uncommon) |
| Credit score required | Varies per lender depending on their comfort zone | Whatever they are willing to lend you. No typical amounts |
| Loan To Value | Varier per lender but oftentimes 640 and above | Rarely asked for |
| Monthly payments | 65-75% is typical | Whatever you negotiate. Best practice is 65-70% |
| Personal Guarantee | Commonly required | Rarely required |
| Proof of Funds | Many will ask for it but some won’t. | Rarely asked for |
| Extra fees/points for lateness, extensions/pre-payment | Usually can provide if requested | Rarely will provide which is rarely an issue |
| Insurance required | Varies per lender. | Usually can negotiate to not have any. Interest keeps accruing |
| Documentation needed | Yes – enough to cover the loan amount at minimum | They don’t usually ask but you must cover the loan amount because they trust you. Do not skimp |
| Appraisal needed | Each lender has their requirements above and beyond standard promissory note and security deed (or similar for states other than GA) | Rarely any. They are trusting YOU |
| Experience required | Most of the time yes but there are exceptions | Rarely – ensure you have solid comparables on the conservative side before borrowing to handle this benefit properly |
| Backed by institutions | No but terms vary for experience | No but rarely penalized for inexperience. However, you must be strong in your due diligence to compensate. Surround yourself with successful people to help bridge the gap quickly. |
| Draw process | Sometimes and these types of loans tend to be more restrictive, in particular if something goes wrong | No, maximum flexibility |
| Draw speed | Varies but typically 2-5 days | Usually 0-2 days |
| Draw fee | $150-$450 each | Usually none or will let you manage money in escrow (have a separate bank account if they allow this) |
| Communication updates (extremely important) | Usually not required – keep them posted anyway | Varies per person – some will not want to hear much about it but best to keep them posted anyway without being spammy |
As you can see there is quite a difference in what in the two types of lenders bring to the table. The hard money lender will have more requirements of varying degrees. The private lender is oftentimes banking on your expertise. There are pros and cons to both with both type of lenders.
The main take away for today is true private lending is much more flexible than hard money almost every time. However, there is definitely a place for hard money and it is something we still use today. The key is to match up them for maximum success and there is no hard and fast rule of what that looks like since everyone’s situation is different.
In the next article, we will break down some of these items in more detail to give you a clearer picture in what expectations oftentimes look like.