Pros & Cons of Hard Money Lenders

Excluding banks and your own capital, there are two primary sources of funding for real estate investors who flip homes: private money and hard money.

There are some similarities and some differences between private and hard money lenders and each have their pros and cons.

Knowing what each source of funding brings to the table as well as where each source may fall short will be important for real estate investors as they look to scale their business.

In this guide we’re going to explain what constitutes private money and what constitutes hard money and go over the benefits and drawbacks of each.

What’s The Difference?

The primary difference between private and hard money lenders is that private money lenders are typically individuals and hard money lenders are typically businesses.

What is Private Money Lending?

As we mentioned above, private money lending is typically done by individuals with a high net worth and their capital typically comes 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 makes doing deals more cumbersome.
3. They don’t usually market themselves, meaning you have to search for them and vet them yourself.

What is Hard Money Lending?

Hard money lenders are typically businesses whose capital comes from a line of credit, private investors or institutional investors. 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.

Pros of Hard Money Lending:

1. If their funding comes from private investors, they have consistent loan terms and large pools of capital which is valuable to flippers who are looking to scale their business.
2. They have clear and consistent processes which makes 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 fees they have to pay their investors.
2. They tend to be less flexible when it comes to making the deal work—they are businesses which 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 institutional investors then they are at risk of losing access to capital if the market goes down and/or interest rates rise, in which case they may call their loans and cease lending altogether.

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.

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

Pros of a Private / Hard Money Hybrid:

1. Their funding comes from their own funds as well as private investors, so they have consistent loan terms and large pools of capital so 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.
4. They tend to be more flexible than traditional hard money lenders when it comes to making a deal work.
5. They lend based on collateral but also care about the individual borrowing the money—if the individual doesn’t have enough cash then they won’t lend on the deal.
6. 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 in return for higher quality service.

Conclusion

The type of lending you choose will largely depend on where you are with your business.

Each model has its benefits and drawbacks and as long as you’re well informed, it’s hard to go “wrong” per se.

If you have a great deal then how you get it funded will matter much less than the fact that you get it funded in general.

That being said, you’ll want to work with a lender you can trust and who makes your life easy. 

If you’re in Ohio, Sharper Capital Partners can be that lender for you.

Your Friends at Sharper Capital Partners,

Chris and Grant