Hard Money vs Private Money: Full Comparison
Both hard money and private money are non-bank financing options used by real estate investors, but they are fundamentally different in structure, cost, and relationship dynamics. Understanding when to use each and how to present financing options to your buyers makes you a more effective wholesaler and a more knowledgeable investor.
Hard money lending defined
Hard money lenders are professional lending companies that make short-term loans secured by real estate. They are institutional operations with standard loan programs, underwriting criteria, and pricing. The loan is based primarily on the property's value (the "hard asset") rather than the borrower's creditworthiness.
Typical hard money terms
- Interest rate: 10-14% annually
- Points (origination fee): 2-4 points (percentage of loan amount) charged at closing
- Term: 6-18 months
- LTV: 65-75% of the after-repair value (ARV) or 80-90% of the purchase price
- Rehab funding: Many hard money lenders fund the rehab budget in addition to the purchase price, disbursed in draws as work is completed
- Closing speed: 7-14 days for experienced borrowers with established lender relationships
- Credit requirements: Minimum scores typically 600-650, though some lenders focus more on deal quality than borrower credit
- Prepayment penalties: Some lenders charge minimum interest requirements (3-6 months of interest regardless of payoff timing)
Private money lending defined
Private money comes from individual people, not companies. Your private lender might be a friend, family member, colleague, self-directed IRA holder, or anyone with capital to invest. The terms are negotiated directly between you and the individual. There are no standard programs, underwriting committees, or published rate sheets.
Typical private money terms
- Interest rate: 6-12% annually (negotiable)
- Points: 0-2 points (often none for repeat relationships)
- Term: Flexible, typically 6-24 months but can be longer
- LTV: Varies by lender comfort level, typically 60-80%
- Rehab funding: Depends on the agreement. Some private lenders fund rehab; others fund purchase only.
- Closing speed: Can be same-day for established relationships. No institutional underwriting process.
- Credit requirements: Based on relationship and trust, not formal credit scoring
- Prepayment penalties: Rarely. Private lenders are typically flexible on payoff timing.
Side-by-side comparison
| Factor | Hard Money | Private Money |
|---|---|---|
| Source | Professional lending company | Individual person |
| Rates | 10-14% | 6-12% |
| Points | 2-4 | 0-2 |
| Speed | 7-14 days | 1-7 days |
| Flexibility | Standard programs | Fully negotiable |
| Relationship | Transactional | Personal |
| Scalability | High (unlimited capital) | Limited (individual's capital) |
| Regulation | Licensed, regulated | Less regulated (depends on state) |
| Rehab draws | Inspection-based disbursement | Flexible, often trust-based |
When to use hard money
- You are just starting out and do not have private lender relationships yet
- You need a large loan amount that exceeds any individual's lending capacity
- You want standardized, predictable terms and process
- You need rehab funding disbursed through a structured draw process
- You are working in a competitive market where closing speed matters
When to use private money
- You have established relationships with individuals who have capital to invest
- You want lower interest rates and fewer fees
- You need maximum flexibility on terms, timeline, and structure
- You want to close in days rather than weeks
- The deal does not fit standard hard money parameters
Finding private money lenders
Private lenders are everywhere, but they do not advertise. Finding them requires networking and relationship building:
- REI meetups and networking events: Attend local real estate investor meetings. Many attendees have capital to deploy and are looking for passive investment opportunities.
- Self-directed IRA holders: People with self-directed IRAs can lend from their retirement accounts. Companies like Equity Trust and uDirect IRA facilitate this. The lender earns tax-deferred returns inside their IRA.
- Professional contacts: Doctors, dentists, attorneys, and business owners often have excess cash they want to invest passively. They do not want to manage properties but are happy to earn 8-10% secured by real estate.
- Existing investors on your buyer list: Some investors on your buyer list may prefer lending over buying. If they have capital but not time, lending is a natural fit.
How this helps wholesalers
Understanding financing helps you serve your buyers better. When a buyer asks "how should I finance this deal?", you can present options intelligently. Including financing scenarios in your marketing package demonstrates professionalism and makes the deal easier for your buyer to evaluate.
Many wholesale deals are lost because the buyer cannot figure out financing quickly enough. By connecting your buyers with hard money or private money lenders who you have vetted, you remove a friction point and increase your close rate.
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or financial advice. Loan terms, rates, and availability vary by lender and change over time. Consult a licensed mortgage professional or financial advisor before making financing decisions.
Related articles
- How to Find Private Money Lenders
- Transactional Funding: Complete Guide
- Bridge Loans for RE Investors
- Proof of Funds: What Buyers Need
Disclaimer
This article is for informational purposes only and does not constitute legal, tax, or financial advice. Loan terms, rates, and availability vary by lender and change over time. Consult a licensed mortgage professional or financial advisor before making financing decisions.