PLP-063 The Difference Between Hard Money And Private Money
They say that hard money lenders are the solution to any real estate investor’s funding impasse. On top of that, there’s been an evident confusion on the difference between hard and private money. What are the distinctions despite seen similarities? Which one should you prefer if you wanted to scale up your business? Learn the top three answers to what makes them poles apart when it comes to funding deals.
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Listen to the podcast here:
The Difference Between Hard Money And Private Money
Intent, Flexibility And Rates Are The Key
I want to take a moment and welcome you and also thank you for sharing your time with me. For this episode, I will attempt to answer a question that I hear a lot in the REIA or Real Estate Investment Association meetings in the community and yet hearing it in the flesh and then seeing things online. To me, there's some confusion there. That is the simple question of what is the difference between hard money and private money? You can start with things like the difference in the terms. Both hard money and private money can be very short-term. In fact, most hard money loans are short-term, six to twelve months. However, the difference with private money is I have some loans that are out three years. Some lenders will provide landlords a ten to fifteen-year loan at a relatively reasonable interest rate at 5%, 6% and they're completely comfortable with it. That wouldn't be me.
However, the real difference for me comes down to the intent and it's not the intent of the loan or the intent of the property or the transaction. It's the intent of the individual. For me, a private money lender or a private mortgage note investor is someone who is typically not in the business of making loans. It's not Wells Fargo or Quicken Loans or name your mortgage company or big bank. Those companies are in the business of making loans and deriving their profits from the interest rates and the points charged. A hard money lender, like the banks or mortgage companies, is in the business of making loans and deriving business income off of those loans. The difference is a hard money lender will typically go to someone like myself or you who want to be a private lender and borrow at say 8% or 9%. Turn around and then loan that money out to an investor at a much higher interest rate. They get the points most of the time.
Some hard money lenders will pay the first lender much more, 10%, 11%. However, when they loan it out to the investors, they're pulling off points and possibly the spread, the difference in between that interest. That's a business. That's not what I do. It's not what I talk about when I talk about private money lending, private mortgages. That is in and of itself the biggest difference for me. When people ask me the question, that's what I like to start. If you go online and I see there's a private lender association, what it is are businesses that loan money to other businesses which, in a way, that's what a private lender does. However, these people have offices and staff and it's their job to look for financing for real estate deals or perhaps they could make loans for inventory or on accounts receivable. They're often a different thing than giving somebody like my partner lending some money to buy a house and wrap it and sell it. The intent is the biggest thing. It makes the most sense if you look at it from that aspect to begin with. You can look at the terms.
Most hard money lenders aren't going to be as flexible as a private money lender. Any hard money lender, and I tell this to private lenders, is always get some type of monthly payment. That way, you have a mechanism for foreclosure. Don't do a twelve-month loan with no payments due until the end of that twelve months and then in those twelve months, that house is sitting there. You could have done something to foreclose on ...