When you’re seeking to finance a real estate venture, private and hard money loans are a couple of common solutions. But, which option should you choose?
The choice between private money and hard money isn’t cut and dry. You need to consider the true cost of this capital.
Here are some of the most important factors to consider:
- The actual cost of the capital
- The ease of raising the capital
- Dependability of the capital
Explore each of these in detail to discover which option best fits your needs. Find out how to determine the actual cost of your investment.
Determining the Actual Cost of the Capital
When it comes to the cost of capital, private money has the edge over hard money. It tends to be cheaper.
The reason for this is simple. Hard money lenders often need to use higher interest rates or fees because they are in the finance business and have typical business costs and overhead associated with that.
Working with a private source for financing, it’s usually a “mom and pop” investor who is usually less sophisticated. They have their money sitting in a bank account or some other investment that is generating unattractive returns.
While there are exceptions to every rule, typically, private money offers cheaper rates.
The Ease of Raising the Capital
The next area is the ease of getting the loan. This is an important consideration that’s often overlooked by investors.
You need to value your time. This includes the time that you spend talking and meeting with investors. You’ll need to explain the investment and make sure that they fully understand what they’re getting into.
Private lenders don’t generally advertise the fact that they have funds available. You need to seek them out and make sure that they are a good fit. You may need to walk them through your entire business plan as they may not be “real estate people”.
Hard money loans are typically easier to obtain than private money loans because you know where you can find them and they also know the real estate business. It’s less of a cost to your time to get the investment.
Dependability of the Capital That You Raise
Hard money loans are typically thought to be more dependable than private loans. Anyone with extra money to invest can become a private investor.
A hard money lender is typically an organization, institution, or company. They may even have licensed real estate brokers working within their firm.
Their funding often comes from various private sources, allowing them to ensure they have the capital available when you need it. This isn’t always true with private lenders.
An individual investor could face a setback or unplanned expense that limits the funds that they have available. These are issues that you’re much less likely to face when dealing with a hard money lender.
Scalable Financing Options for Real Estate
One of the drawbacks of private money loans is that they’re not scalable. Private investors often have a limited amount of money to loan out and after funding a deal or two run out of money. Many of our clients at Legacy Capital have raised substantial private money but when they took their business to the next level they came to us because their private money wasn’t enough to fund the growth and expansion of their real estate business.
Hard money lenders can give you room to grow your real estate business. A private investor may be limited in the amount of capital that they can raise, while a hard money lender will have multiple sources to meet your needs.
Combining Both Options to Finance Your Real Estate Investments
Of course, there’s also the possibility of combining hard money and private money. You could use one form of financing to cover a gap not funded by the other.
For example, let’s say that you manage to raise 80% of the required capital for your Pennsylvania real estate through a hard money loan. You could then seek private money to cover the remaining 20%.
Final Thoughts on Choosing the Right Financing Option
The terms “private money” and “hard money” are often used interchangeably. But, they’re not always equal. There are notable differences between the two.
The bottom line is that there are pros and cons to both options.
Hard money is more stable, scalable, and dependable. It’s generally easier to find these lenders and they’re less likely to get directly involved in your real estate plans.
The only drawback is that you’ll typically get your capital with higher terms compared to private lenders.
But, you need to keep in mind that these are generalizations. You won’t always need to pay more through higher terms with hard money lenders.
In addition, your hard money lender may be able to provide value beyond the capital their provide you. At Legacy Capital, we have almost twenty years experience in the real estate industry, as investors, developers, lenders and note buyers. As a result, we often consult with our clients to help improve the profitably and speed of their projects.
The truth is, you need to evaluate your options and establish positive relationships with the lenders that you choose – whether you go with private money, hard money, or both.
Always consider the true cost of capital. Balance the actual cost of the loan (the terms), with the amount of time needed to obtain the loan, along with the stability and scalability of the lender.
If you’re currently seeking capital for a Pennsylvania real estate venture, you should start by searching for a reliable hard money lender – such as the experts at Legacy Capital.