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What is the Difference Between Hard Money and Private Money?
24 Nov 2008 | 2 Comments | posted by Corey Curwick Dutton | in Hard Money
Depending on who you talk to, most everyone will tell you that private money is just a nice way to say ‘hard money.’ Since the word ‘hard’ just sounds so, well, hard, most investors or brokers think you mean hard money when you use the term private money. However, the world of private money is expanding so rapidly with the opportunities associated with tight institutional money. More investors are jumping into the private money game and there is beginning to be a slight difference between private and hard money.
Some of my private money lenders will lend between 12 and 18 percent with points while a typical “hard money” lender lends from 18 and up with points on top of that. I think with the sudden influx of more private lenders in the scene, my team can safely say there is a difference between those who are strictly “hard money” lenders and those who lend at more reasonable rates.
Another thing I will add to this post is related to choosing who you take money from and through. One of my primary motivations for starting this blog is to try and keep the private money scene ‘real.’ All legitimate private money brokers and lenders will require a due diligence deposit so don’t be afraid to give them money upfront to get the ball rolling. However, don’t just give due diligence money to any broker or lender unless you’ve first done your own due diligence on them. Make sure they’ve been in business for longer than a few months. Also, make sure they have some kind of brick and mortar office they are working out of. That always helps!
With so many new private money lenders and brokers entering the scene, you have to pick who you deal with carefully.
I’d be curious to see if there are any hard money lenders or brokers out there who wish to comment on the huge influx of new “players” that have recently entered the private money scene. Any thoughts or comments on this?
Posted by Blake Reese – November 25, 2008
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2 Comments
I don’t think private money and hard money is the same thing. Hard money lenders are working with private investor money to make their loans.
As an investor the goal is to bypass the hard money lender by working directly with private money investors.
Some private money investors are happy with 8% and no points. Hard money is a scam by itself. HM lenders charges outrageous rates and points.
I never worked with a HM lender and never will.
Jack,
You say that hard money is a “scam” but in some cases it actually works out to be cheaper to use hard money rather than bring in a partner that will take the lion share of the deal.
For example, let’s say you’re buying a commercial building for $1MM that is valued at $2MM. You will need to bring in at a minimum 30% down towards the purchase, sometimes more depending on the lender. However, what if the property needs rehab? Not to mention all of the other expenses involved in getting a commercial property up and running. If you don’t have the cash to float it yourself you have 3 options in this market:
1. Go to a family member to get the cash
2. Bring in a partner
3. Go to a private lender or hard money lender to get the cash
Now in most cases, bringing in family to a business deal is not even an option.
The second option, bring in a partner, is viable but how much of your equity is this partner going to want for his/her cash contribution? Probably a lot more than their short term cash is really worth. Not to mention, you can’t just get rid of your partner once you pay him/her back their cash. Oh no, these people stick around like bugs on a light at night. Partners just don’t go away. You would probably end up giving this partner somewhere between 45-65% of the equity in that property, not to mention a cut of the cash flow once it starts producing. You aren’t going to get a partner in this deal that will accept a mere 8% per year!! You’re dreaming with this option.
Ok, now to option number three. Bring in a hard money lender. Now let’s say you got a “hard” money lender to give you a loan at 13% and 5 points. That’s only 13% APR. Again, that’s APR of ONLY THE CASH YOU BORROWED, nothing more. Now that 5 points, that’s going to be 5% of your equity in that building right out of the blocks. So let’s say worst case scenario you pay your hard money lender off in 2 years. And let’s say he loaned you $450,000 towards the purchase, rehab, and upkeep of your $2MM commercial building that you got for $1MM. After 2 years, you’ve paid this hard money lender only the interest on the $450K and 5% of the $450K which is a whopping $22,500. The best part is that your hard money lender is OUT of the deal. He gets no part of the cash flow and only a tiny bit of your entire equity in the deal. No strings attached. Shake hands and walk away. For a loan of $450K from a partner, you may as well kiss $500K of your $1MM in equity goodbye.
I think you need to do the numbers and reconsider your options. You will not be able to find a “private lender” in this market that will give you their cash that is in extremely high demand for 8% and no points. I can almost guarantee you that. Hard money lenders have a bad name but obviously, if you do the math and consider your options, its better than bringing a partner into the deal!!