The difference between hard money and private money

In recent articles, I have talked extensively about hard money loans for multi-family properties. What I’d like to do here is compare hard money to private money, which are similar in different ways, but definitely get confused when investors discuss them.

Both hard money and private money are typically asset-based loans, backed more by the strength of a real estate purchase than the financial credentials of the borrower. Both come from non-traditional lending sources (meaning they are not national banks or lenders either). So what makes them different?

Hardcore lenders, despite their non-traditional status, are still organized lenders and are usually licensed to lend money in some way. Private lenders are just what the name suggests, private. It could be a friend, family member, business associate, or maybe just a professional recommendation. In any case, your role as a financing provider is strictly what you agree with them.

Hard lenders often have lending criteria. Your loans have defined durations, interest rates, and starting points, all of which are known before a loan is issued. In fact, these criteria are often used to differentiate and select hard money lenders when investors search for available options.

Private money is much more flexible in all the points mentioned above. Most do not have set criteria and the loan terms you agree to with them are almost always a function of how well you negotiate for a particular loan. Loan limits, interest rates, and loan lengths are, as they say, “open for discussion,” so a simple compromise to a mutually agreeable deal will often do the job.

One important thing to mention is that private money is characteristically cheaper than hard money. This is not always the case, but it is a common trend nonetheless. Why is this? Most hard money lenders get their funds (at least in part) from private sources, so they must increase their interest rates and fees to make a profit. When you work directly with private sources of capital, you effectively cut out the “middle man” and therefore can be in line for better terms.

The obvious caveat for private money is that lenders rarely advertise that they have money to lend. Hard money lenders will often do exactly that, because they are specifically in the lending business. It just makes sense that they promote what they do. Because of this, hard money is often easier to find and requires less business/negotiation skills to get a loan. If you’re willing to put in the effort, private money is readily available, very comparable to hard money, and therefore a great way to fund deals.