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Should I Use Either Private or Hard Money as an Investment?

Linda Baumgarten

When it comes to investing in a property, the first three things that come to mind is money, money, money. If you look hard enough, you can find dollars everywhere. But what is the best option when it comes to taking lends or exchanging funds between different parties?

If you are looking to deal with a lender, there are basically two different types: private and hard money based. Granted, these differences are subtle at best – cash is cash after all, and no one wants to end up on the short end of the stick when it comes to parlaying with separate sources. After all, finding a profit will always be mutual. But if you want to be the most successful investor out there, you simply must know the difference between both kinds of lending types.

 

Suitcase full with dollars
Cash is cash after all

Private

The word “Private” may sound like something institutionalized and kept secret, but when referring to a lender it means anyone who isn’t working for a bank any other profession dealing in funds. Friends, family members, coworkers… almost everyone you are acquaint yourself with every day is a private money owner! In other words, your ideal private money lender can range from someone you’ve known for years to a stranger with the same common interest.

These more personal investments have the financier acting as their own bank, setting up their own standards of interest for their investment. Their loan is also kept secure by receiving the real estate mortgage or trust deed upon you, as the investor, acquiring the property.

Why go private instead of just going to a bank for a loan? Two advantages: speed and cash. Traditionally, the deals can take up to 45 days to close, if not longer. But when you are dealing with one person, you can get the funds almost immediately. Through these kinds of backers, you can make an offer sooner than most which is a great way to stand above the competition. Sellers tend to favor cash over digital funds since statistically speaking there are far fewer things that might go wrong with cash transactions. After all, if a deal falls apart, they’ll feel more comfortable being able to leave the cash on them rather than the numbers on their bank account.

You can also make a great deal with a partner. Let’s say there is a seller who wants to market their vacant house quickly but would rather barter for less since they live out of town and the house needs repair work. The after repair value (ARV) is $10k, the sales price is $80k, the loan balance is $60k, and the repairs are $10k. You agree to buy the house for the $80k and take care of the construction, leaving the seller to pay you while put in escrow the $10k needed. Every time you spend $2k in repairs, the seller reimburses you the $2k from the escrow account. Why is that useful? Because while you are paying for the improvements with your money, the seller reimburses you whatever needs to be paid with their money.

Then, the seller will loan you the repair money at no interest cost in exchange for splitting the profits on any amount over $94k when you sell the house. The reason why they’d do this is because they don’t need to worry about the vacant house, they get the house rehabilitated without needing to do anything, the $10k was going to be spent on the overhaul anyway, and they get $13k if the house sells for $100k with no problems. If the house sells more, they make more.

But what about you, the investor? With this, you will buy the house with no money down, borrow repair money with no interest, make more money if you saved on repairs, sell the house for $100k and make $17k profit minus expenses, and you have successfully made a deal with future partnerships more likely and profitable!

 

Hard

Meanwhile, “hard money lenders” are a bit, well, harder to deal with. They are usually individuals or companies who lend out riches for the purpose of buying and rehabbing properties. Having credit or employment isn’t required; their safety net is holding the property as collateral. They are basically semi-institutionalized, meaning that they are officially licensed to lend money, but aren’t representing a bank or mortgage broker.

“Hard” money might sound difficult to get, but it’s actually the exact opposite. The terms and criteria they will be asking for will require more information, but overall these loans are far easier and more reliable to obtain. These lenders have a set system for their standards, so making an agreement is far less of a hassle. They also work exclusively based around the number of assets you have. Even if you have bad credit or severe debt, they are still willing to work with you.

However, you must remember one thing about hard money lenders: the cost of dealing with them is steep. It isn’t uncommon at all if they request up to 15% percent interest and points, as well as additional upfront percentage fee based on the loan account. It may sound like a high risk to spend so much, but you must keep in mind that the loan will probably only last a few months compared to how long it’ll be when dealing with a bank loan.

Typical terms of a hard money lender can go by 70% of the value of the property as the maximum loan amount, a 12-18% typical interest rate, a term of six months to a year, 2-10 points and interest-only payments. When borrowing from hard money lenders, you will make interest only payments.

Still, although the interests are high, it’s less than paying a partner 50%!

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