A Quick Note on Private Money vs. Hard Money

Merry Christmas eve to everyone!

Today, I want to quickly talk about….

Private Money vs. Hard Money

First of all, I hope you don’t confuse private money with hard money.  They are NOT the same!  Although hard money may come from a private individual just like private money,  there are significant differences. I’d like to go through them with you right now.

Here are the main differences:

• Hard money = points up front, high interest, low loan to value, draws for repairs (if any), selective on deals, mandatory refinancing or cash out, short term, contingencies
• Private money = lower interest rate, no points, no draws, longer term, more flexible, no contingencies, profit sharing

Real estate investors that use private money to power their way to profitable deals don’t have to give hard moneylenders the time of day. Who wants to pay 5 points and 15% interest? Plus fees and closing costs? Talk about ouch!

The biggest problem with hard money is lack of flexibility.  You are constrained by the lenders requirement.  How do I know this?  Because I make hard money loans.  Yes, I take private money from my investors and, when I have a few hundred grand in extra cash laying around in the bank,

I  lend that money out.  I have very strict rules and make sure that the person I am lending to is ultra-credit worthy.  Most people do not qualify for hard money loans with me. The deal has to be so good that I would buy it for the amount I am lending.

Now,  what do I tell real estate investors buying foreclosures or short sales who come to me for hard money but don’t qualify?

This is a great opportunity for me to teach them how to get private investors!

First of all, just because I won’t lend them money doesn’t mean they won’t make money on the deal.  Often, the deal is out of my ‘strike zone’ and I will pass on it.  The best advice I give to these investors is that private money will cure all of their ails for buying houses.  If they had a private money lender or partner, they could simply pull the trigger on the right deal instead of shopping it around to see if any lender will loan money on it.

Secondly, if you have to rely on hard money financing for the deal, you may lose it to a cash buyer.  These things have a habit of happening a lot because banks and other asset managers don’t like to wait around to see if you are going to get approved.  Also, you may not get approved for hard money loan for the amount you need to do the deal.

Now that you know some of the basics between hard money and private money, you know why it is so critical to quickly build your stable or private investors.  Never let your profits or your future be subject to the strict criteria imposed by hard money lenders.  There is far too much money left on the table – I’m talking thousands  on every house – that could be yours with just one private investor.

Think about it.

Private Money = Huge Profit (and no headaches!)