Real Estate Investors Association of Greater Cincinnati

Excluding banks and your own capital, there are two commonly used sources of funding for real estate investors: private money and hard money.

Knowing what each source of funding brings to the table as well as where each source may fall short will be important for you as a real estate investor looking to scale your business.

What is Private Money Lending?

Private money lending is typically done by individuals. Their capital may come from extra cash they have on hand, self-directed IRA/401(k), a line of credit, etc.

Pros of Private Money Lenders:

1. They usually lend their money locally, so they know the area well.
2. They may have lower terms than hard money lenders because they have less overhead.
3. They tend to be more flexible than hard money lenders when it comes to making a deal work.

Cons of Private Money Lenders:

1. They have a limited pool of capital, which means you’ll likely need to use many rather than one. This can make it difficult to manage relationships.
2. They typically have a less formal process than hard money lenders which can make doing deals more cumbersome.
3. They tend to market themselves via word of mouth or referral only, meaning you’ll likely have to search for them and vet them yourself.

What is Hard Money Lending?

Hard money lenders are typically businesses with capital that comes from private or institutional investors and business lines of credit. Hard money lenders get their name from the fact that they lend against hard assets (i.e., real estate) and are often given a bad rap because of their tendency to focus more on their collateral than their clients. (If you’re not ‘bankable’, this can be a good thing with the right hard money lender).

Pros of Hard Money Lending:

1. They have consistent loan terms and large pools of capital, which is valuable to investors who are looking to scale their business.
2. They have clear and consistent processes which make funding a deal fast, professional and predictable.
3. They lend based on the asset being used as collateral, so as long as you bring them a good deal, you’re more likely to get approved for funding.

Cons of Hard Money Lending:

1. They typically charge higher fees and interest rates because they have more overhead including, the returns they have to pay their capital investors.
2. They tend to be less flexible when it comes to making the deal work—they are businesses that may operate nationally, meaning they don’t know each individual market and are less likely to work things out.
3. If their funding comes from institutions, then they are at risk of rising interest rates due to changes in the federal funds rate.

A Private Money / Hard Money Hybrid

In our opinion, the best lenders to work with are the ones who operate like a hard money lender but provide the personal touch of a private money lender.

Some lenders, such as Sharper Capital Partners, marry the pros of private and hard money lenders while minimizing the cons of each.

Pros of a Private / Hard Money Hybrid:

1. They’re privately funded, so they have consistent loan terms and large pools of capital. This means their ability to fund deals isn’t affected by changes in the market or rising interest rates.
2. They have clear and consistent processes which makes funding a deal fast, professional and predictable.
3. They lend their money locally so they know the area well and can underwrite deals quickly and confidently.
4. They tend to be more flexible than institutionally backed, hard money lenders when it comes to making a deal work.
5. They will market their business, meaning you won’t have to spend as much time searching for them, as they’ll likely find their way to you.

Cons of a Private / Hard Money Hybrid:

1. There may not be a business with this type of model in your specific area.
2. They may charge higher fees.

Conclusion

The best type of lending for you will depend on your circumstances. Each model has its benefits and drawbacks and as long as you’re well-informed it’s hard to go wrong. That being said, you’ll want to work with a lender you can trust and who makes your life easy.