Developing land or commercial property is expensive, and sometimes you may need additional cash resources to close the deal on a new investment property. Hard money lending and private money lending are both valuable resources when a traditional bank loan or commercial mortgage is not an option.
Knowing the difference between these two types of lenders and loans can help you make the best decision for your next real estate investment project. Both hard money lending and private lending typically lend short-term loans with higher interest rates. The difference occurs in where you secure the money from and the specific terms of the loan.
What is a Hard Money Lender?
A hard money lender is a loan company that focuses each loan on collateral—often the real estate investment property. Hard money lending does not rely on credit checks or require a specific type of property or project. Even though they focus the loans on collateral, they generally fund less than 100 percent of the investment property.
These lenders work with clients that traditional banks may not consider because of poor credit, spotty job history, or lack of financial documentation to show the project will be a success. Because of the risks involved, hard money loans are typically short-term loans—one year or less—and include a higher interest rate and upfront loan charges.
What is a Private Money Lender?
A private money lender is a person, group, or company that has the capital available to invest in your real estate purchase. They will also work with clients that traditional banks may not consider. However, they spend more time researching the person or company applying for the private money loan.
These lenders examine the project details, type of property, and how you plan to repay the loan. Collateral is not as big of a factor in many private money loans but included as a backup payment method.
The most significant difference between hard money lending and private money lending is how the loan terms are structured. The flexibility and creativity that a private money lender can bring to the loan process is an advantage for investors and developers. Since private money lenders take more time to research their loan requests, they can better negotiate their loans to match client requests.
How to Know Which Lending Source is Right for Your Project?
Hard money lending and private money lending are both valuable resources when you need an influx of cash for a real estate investment. However, knowing what you need from your loan provider and how you expect to pay back the loan will help you determine the best route.
If you are looking for a loan provider to partner with in ensuring your success and want to gain the financial flexibility you need to complete your next real estate investment, a private money lender is your best choice. They will work with you to make sure you have a solid plan in place to pay back the loan and develop loan terms that work for you.
Need Money for Your Next Real Estate Project?
Located in Boston, MA, we are experienced investors at Diversified Funding Incorporated. We specialize in secured real estate loans across New England and can help you get the resources you need for your next investment property or real estate investment. When you place your trust in Diversified Funding Incorporated as your private money lender, we become a partner in working towards the success of your project.