A hard money lender is an individual or a company that utilizes its capital to fund other people’s businesses, mainly commercial real estate. These individuals and companies are independent of any financial institutions and interact directly with the borrowers

A private money lender is an individual or entity that issues loans secured by a trust deed and note to fund a real estate deal or transaction.  Generally, private money lenders are relationship-based lenders.  These are non-institutional lenders that provide short-term loans for the purchase of investment properties.  An investor can also get a rehab loan from a private money lender.

A real estate investment deal is incomplete without money.  As a professional real estate investor, you should always be actively looking for ways to bring in private money lenders to fund real estate investments and tie up deals.  Typically, private money loans are best utilized by short-term fix-and-flippers.  However, private money lenders also provide funding to long-term investors in need of cash-out refinancing, quick funding, and loans for rehab projects.

The difference between hard money and private money is not always clear. However, as you can see, they both differ slightly and have different strengths and drawbacks. 

Which one is right for you should be decided on an investment by investment basis. That being said, hard money loans do offer a level of security and industry know-how that your average private lender or Uncle Remus cannot. Therefore, unless you and your private lender are both confident and experienced with real estate investment, it could be worth applying for a hard money loan.

Hard money loans play an important role in real estate rehabilitation. They provide real estate investors with funds to improve and increase the value of properties that may be in bad repair.

A hard money loan can be used to finance the purchase or repair of rental properties, apartment buildings, vacant single family homes, office buildings, industrial warehouses, commercial properties, construction and rehabilitation projects, and even vacant land.

• Understanding the Loan: Be sure to know exactly what you are asking for. What does that mean? It’s crucial you do your own research or ask questions about the loan you are seeking; this includes making sure you qualify, knowing the loan terms and interest rates, and when it has to be paid back.

• Collateral Analysis: Hard money loans must be backed by tangible assets; this means it is absolutely crucial to define the value of these real assets and what this value is based on. This is important to do at the beginning, so that your lender has all the facts up front. As part of defining the collateral, location of the property is key. Be sure to tell your lending specialist about the area surrounding the property or any alarming indicators they should know about. Know the exact location, bring photos of the estate and if you can, the areas surrounding it is as well. The more information you have about it, the better the lender will know if it’s a safe investment.

• Documentation: It’s true, hard money loans are based on the value of collateral, not credit scores. However, the lender will need to see a few documents to ensure that you are ready and able to pay back this loan. This may include documentation of your income per month, that way the specialist can understand your financial situation and feel secure. Other documents could include: proof of credit, tax information, other assets you own or previous repayment plans.

• Plan for Repayment: While it’s important to have a plan throughout this process, you should already be preparing for what happens after you receive the loan. Your plan or method of repayment is a big question your lender will have for you. Having a clear idea of this and knowing the details will only help with a smooth loan transaction.

Loan sum:
The total sum you can borrow with a hard money loan is based on the value of the property you’re rehabbing. An after repair value (ARV) loan is typically between 65 and 70 percent of the projected selling price, and a loan to cost (LTC) loan is usually 75 to 80 percent of the amount you’ll need to purchase and rehab the property. A bank loan usually only covers 70 percent of an investment property’s asking price. In some cases, investors with a proven track record can get additional funding to cover renovations.
Loan term:
A hard money loan is as a short-term loan of (usually) maximum 12 months. A bank loan can be structured for a much longer term—10 years, 15 years, or even longer.
Interest rates:
Interest rates on hard money loans are high, typically between 14 and 18 percent. Interest on a bank loan is the same as the going mortgage rate, which is usually between four and five percent.
Loan requirements:
To qualify for a hard money loan, you’ll need a well-researched business plan that substantiates the requested loan amount. You’ll also need the cash balance of the total costs that isn’t covered by the loan amount. The property itself usually functions as the collateral. A bank loan requires you to have enough cash to cover both your regular mortgage payments and the loan payments for the investment property for at least six months. In addition, you’ll need to make a down payment of 30 percent.
Loan eligibility:
The eligibility requirement for a hard money loan is typically a sound business plan. Note that the lender will do its own research to corroborate that fact. In some cases, hard money lenders require inexperienced investors to have a credit score of at least 620, as well as additional collateral, such as your home or another valuable asset. A bank loan will consider your credit history, current credit score, and employment plus income information. A bank will not consider projected income from your investment property when evaluating your eligibility for the initial loan.
Property limits:
Hard money loans don’t cap the number of properties you can finance, which means that investors can build their portfolios by working on a large number of properties simultaneously. Banks aren’t permitted to finance more than 10 properties per lender.
Speed to obtain a decision:
Hard money loans are evaluated quickly, so investors typically get a decision within days. Banks can take as long as three months to evaluate a loan application, so that’s why its important to use a loan intermediary.
Now you know the difference between hard money and bank loans, you’ll be better equipped to choose the financing option that’s right for you. Just remember: If something isn’t clear in the description of any loan, ask plenty of questions to be sure the agreement lives up to your expectations.