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Private/Hard money lenders are the most important people to establish a relationship within the real estate industry – at least if you want to run a sustainable business. Whether you are a new real estate investor or a seasoned veteran, chances are you will want to scale your business sooner rather than later and government mortgage bank loans (FHA,VA,etc) will allow you to scale to only a certain amount as there’s a limit on how many of those loans you can get. Aside from finding the good deal there is one more piece to the puzzle that every successful real estate investor must find on their own: funding. That said, any hopes of completing more deals would depend on building relationships with those that have the necessary capital. There are exceptions of course, but private/hard money lenders are a critical component to any real estate investor’s arsenal.
Private/hard money are integral to the growth of every new investor. They essentially provide the confidence and funding required to complete more deals. Of particular importance, is the liquidity private/hard money lenders can offer investors and their businesses. Additional funds insulate people in our industry from risk and allow them to diversify their portfolios. The cost of a private/hard money loan to the borrower is typically higher than financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule. Given that funding processes can move quickly, giving you the ability to close deals that others can’t. That’s helpful in hot markets when properties get multiple offers.
Both sources are certainly worth their own considerations, but investors are advised to be able to differentiate between the two. To help you understand the differences between private money and hard money, we have provided the following:


Funding deals with Private Money

In their simplest form, private money lenders are those people with the means and intent to invest capital. Consequently, anyone with a little extra money and an interest in what you do may be typecast into the role of a private money lender. It is up to you, however, to see to it that the convergence between your business and their interests takes place.

It is important to note that private money lenders are just as interested in working with you, as you are interested in working with them; it is really the quintessential symbiotic relationship. Both sides stand to gain something from every deal that is struck. In return for interest on their investment, private money lenders are entirely capable of bringing speed and efficiency to every transaction. Additionally, your leverage will increase exponentially when you offer to purchase a property with private-cash funds.

It is not uncommon for the funds from a private lender to go towards the purchase price of a property and subsequent renovation costs. The lender, however, will receive both the mortgage and a promissory note at the time of closing. Think of this as their insurance policy. The investor, on the other hand, will proceed with the renovation and put the funds to work. Following the completion of the rehab and its inevitable sale, the lender will be given their principle plus interest payment, and the borrower will collect what’s left.

As I mentioned before, private investors can benefit immensely from investing their own capital in the ventures of others. First and foremost, their money will work on their behalf, coming back with interest on top of the principle investment. Their investment is also protected, as they will receive the property itself as the collateral. In fact, private money lenders are awarded more safety than many other investment vehicles can boast.

At the cost of somewhere between six and twelve percent interest on the money borrowed, real estate investors will be given the opportunity to close on more deals in a shorter period of time. What you pay in interest comes back in the form of volume and efficiency. It is truly the definition of a win, win scenario for both parties involved.

More often than not, private money lenders tap into their own bank accounts to fund a deal. That said, you won’t have to wait an extended period of time, and can move quickly on time sensitive deals. Consequently, traditional bank loans can offer nowhere near the efficiency of a private money loan.


Funding deals with Hard Money

It’s no secret; savvy investors know that they need to compliment their private money sources with a hard money lender. That said, I could argue that a hard money lender is the most important person you will work with on a project at any given time. Just like private money lenders, hard money also typically covers the cost of purchase and rehab expenses. However, hard money lenders are typically more organized and semi-institutional. Perhaps even more importantly, however, they have been licensed to lend to investors like yourself.

Hard money funding is typically distributed in draws against the work being done. It is, therefore, relatively common for a hard money lender to set up a payment schedule for completed work.

It is also important to note that the term “hard money” does not imply a degree of difficulty in acquiring said funds; in fact, it’s quite the contrary. While the terms and criteria that accompany a hard money loan can be extensive, they are typically easier to overcome and more reliable than your standard institutional lender. If for nothing else, receiving hard money approval is easy in the face of a promising asset. You see; most hard money lenders make their decisions based off of the asset in question. It isn’t until after the home has been deemed promising that they will even see if the borrower qualifies. In other words, the more promising the project, the more likely you are to receive a hard money loan.

While hard money is certainly a bit more expensive to borrow, it is more reliable. That said, it is not subject to traditional credit guidelines (the same ones that protect banks). Instead, fees for borrowing hard money are often delineated in points (three to five to be exact). Points represent an additional upfront percentage fee based on the loan amount. It is important to note that these fees are not universal, and different hard money lenders will bring different terms to the table.

Subsequently, hard money lenders are trying to mitigate risk by increasing interest rates, thus charging investors more for their services. But that increased rate is more than worth it, considering investors will be able to move on deals much faster than they would be able to with a traditional loan.

It is rare that a hard money lender will fund an entire deal. It is more common that they will only fund a percentage of the purchase price or the after repair value (ARV) – usually, around 75%.

In the end, chances are a hard money loan is your best bet to secure a deal with a great profit margin. While five points may sound difficult to overcome, sometimes the profit margins awarded to those who can close on a home quickly are well worth the investment.

Even with all of this in mind, investors are still advised to use caution when working with a hard money lender. I encourage you to have multiple exit strategies lined up in the event something unexpected happens.

Private hard money lenders have become a trusted source of funding for real estate investors on nearly every level, regardless of their experience. Both hard money and private money, for that matter, have become the backbone of any successful real estate entrepreneur. You simply can’t beat the speed and efficiency they have to offer. While they may come with a heftier price tag, I can assure you their positives greatly outweigh their negatives.


When would you need either Private or Hard money?

  • You have reached a point in your investing career where you have scaled to the point that you have exhausted all your government loan options. Private and Hard money are now your only options to continue scaling.
  • You are a Fix&Flip investor.
  • You need a fast closing.
  • You can’t provide the documents needed to qualify for a government loan program.
  • For investor savy reasons, you want your properties under your entity. (For liability, taxes, etc)
  • You don’t want to sign a personal guarantee. 



Private/Hard money loans can be an excellent way to secure a real estate investment. Real estate investors, house flippers, developers and rehabbers use these loans because it’s a quick and easy way to secure financing. Compared to a conventional loan, the interest rates are higher, but the higher rate is offset by the fact that the borrower can access the funds much faster and the loan is based primarily on the asset being purchased rather than the borrower’s personal approval or credit.