Four Reasons Why Private Money Is Better Than Hard Money

In this blog, I would like to show you why I prefer using private money over hard money. Don’t get me wrong, I think hard money is good. But, when set up properly, private money can be even better.

Now, there is no standard way that hard money loans are done and there is no standard way that private money loans are done. But, we can still do a general comparison. When we compare the two, we can see that there are four main reasons why a real estate investor is better off using private money.

Interest Rate

In today’s economy, hard money loans typically have a fixed yearly interest rate in the 12 to 20% range; some can be even higher. Private money loans typically have a fixed rate somewhere in the range of 6 to 15%.

Points

A single point represents one percent of the loan’s principal amount.Points are usually added to the beginning of a loan. For instance, if you borrowed $100,000 from a lender who charged four points, then at the closing you would get $100,000 but sign documents saying you owed $104,000 (plus interest.) Points on hard money loans can be in the neighborhood of 1 to 5, or more. Unless you are going through some sort of loan broker, private money loans usually do not have any points.

Loan To Value (LTV)

Hard money lenders usually like to have a loan-to-value in the 50 to 65% range. I have seen a few hard money lenders who have gone as high as 80% in special cases. Private money lenders can go even higher than 80% LTV if they like the real estate that is securing the loan.

Length of Loan

 

Hard money lenders want to get paid in full quickly so that they can re-lend the money. This means that they usually want to loan money for as short as a few months to as long as a couple of years. A one-year loan is their most common product. Many private money lenders will offer loans for more than a year. It is rare, but I have seen a few 30-year private money loans.

Now, I’m not knocking hard money loans. If that is all that you have available and you have an investment opportunity that will easily cover the cost of a hard money loan while still leaving you with a handsome profit, then by all means go for a hard money loan. But, if you can set up an agreeable private money loan, then there will always be more profit left on your side of the table.