Private money lenders are people who have the means and intent to invest capital. Therefore, anyone with a little extra money and an interest in what you do can be typecast into the role of a private money lender. Both sides stand to gain something from every deal that is struck. More often than not, private money lenders tap into their own bank accounts to fund a deal.
However, be aware that it is not uncommon for private money to go towards the purchase price of a property as well as subsequent renovation costs. However, the lender receives both the mortgage as well as a promissory note at the time of closing. It is their insurance policy. On the other hand, the investor puts the funds to work and does the renovations. Once they are completed and the property is sold, the lender is given both their principle as well as an interest payment of somewhere between six and twelve percent. The borrower then collects what is left.
A hard money lender is used to complement private money sources. They are both short-term, high-rate loans, and will usually cover both the cost of purchase and remodeling expenses. However, there are several differences between the two. First and foremost, hard money lenders are typically more organized and are semi-institutional. In addition, and perhaps more importantly, is the fact that they have to be licensed in order to lend to investors.
While the terms and criteria that accompany a hard money loan can be extensive, they are typically easier to overcome and more reliable than your standard institutional lender. Additionally, it is not subject to traditional credit guidelines as most hard money lenders make their decisions based off of the asset being funded. Therefore, it is not until after the home has been deemed promising that they will even consider the loan. In other words, the more promising the project, the more likely it is to qualify for a hard money loan.
It is rare for a hard money lender to fund an entire deal. It is more common that they only fund a percentage of the purchase price or the after repair value. It usually works out to be around 70 percent which is why you need both a private money lender as well as a hard money lender. In addition, it is common for the duration of a hard money loan to top off at 12 months. Therefore, if it may go longer, you will either need a private lender or will need to look into a traditional mortgage.
Both have become the backbone for any successful real estate entrepreneur as you simply cannot beat the speed and efficiency that they have to offer. While they generally come with a heftier price tag, their positives greatly outweigh their negatives. However, whether you use one or the other or both, it is best to have an exit strategy lined up before you enter into any monetary arrangement.