The traditional means of purchasing rental properties is to secure a mortgage loan from a bank. As a landlord, you might be interested in non-traditional ways to purchase your next rental property. Both private and hard money are forms of non-traditional funding. They fall outside the realm of traditional bank lending. Private and hard money funds depend less on your financial standing and more upon assets you own. Instead of relying more so your credit score and employment history, private money lenders may ask for asset-related collateral to back up the loan. In this quick article, we’ll look at private lending vs. hard-money lending to help educate you on the differences.
Defining Private Lending
As the term indicates, private investors provide the funds for private lending. Private money can come from anyone; a family member, business associate or friend. Because of this, private lenders are typically more flexible overall than hard money lenders. Private loan terms are precisely what both parties agree upon. Your negotiation skills carry more weight in a private money lending situation. The loan terms are contingent upon your ability to discuss and mediate.
In most cases a private loan will be less costly than a hard money loan, but this is not always the case. Ironically, private lenders are not always in the business of lending. Whereas, a hard money lender’s entire business consists of marking up interest rates on private money. Private money lenders don’t usually advertise that their funds are available. Advertisements from loans in this category are from hard money lenders.
Identifying hard money lending
Hard money lenders have a license to loan money and place specific criteria upon their loans. All facets of the loan will be known upfront, before the issue of the loan. They will more than likely be more rigid upon their requirements. These loans typically cost the borrower more because of interest. Hard money lenders increase the interest rate because they get the funds from private sources and need to make a profit. Hard money lenders get their funds from private investors, the increased interest rate passes on to the borrower.