If you want to purchase an investment property, then you’re most likely going to need capital. Most people are quick to schedule an appointment with their local bank, but is that the best move? Not always. Depending on your goals, a private or hard money loan may be more beneficial. Today, we’ll explain the difference between these different types of loans, and why you might want to choose a hard money lender over a bank.
Hard vs. Private Money: What’s the Difference?
Technically, “private” loans are loans given by friends, acquaintances, or relatives. For example, if you ask your parents for $10,000 so you can buy a car, this transaction would be considered a private loan. However, more-often-than-not, people use the words “private” and “hard” interchangeably. Hard money lenders use their clients’ collateral to secure funding. That is why hard money loans are also called “asset-based loans.”
Hard Money Loans vs. Traditional Mortgage Loans
To be clear, there’s nothing inherently wrong with traditional mortgage loans. The main issue with them is that it can take a while for investors to receive funding. This delay can hamper even the savviest investor. If you want to secure a property quickly, then you’ll likely need funds quickly – an advantage that only hard money loans can offer. Comparatively, interest rates on hard money loans tend to be higher than traditional mortgage loans, but the trade-off is that you can close properties much faster.
When to Choose Hard Money Lenders
You should choose hard money lenders when you want to fund short-term investment projects, such as new construction or properties that you plan to fix-and-flip for profit. For longer-term investments, such as tenant-occupied rental properties, ask yourself if you need funds faster than the bank can provide. If you’re highly committed to a particular property, but fear that you might not have funds in time to bid on it, then you should certainly seek out a reputable hard money lender.