Investors often talk about getting and using private money. But what is it really? Private money is an alternative financing source to institutional and hard money, that you use to finance all of your real estate deals.
It may be easier to start with discussing what private money is not. When you Google “private money” or “private money lenders” there are lots of results that pop up, both paid and organic. Those results are actually hard money lenders.
Hard money is not the same animal as private money. Hard money lenders like to market themselves as private money lenders because it makes them sound more appealing. Hard money is expensive, often with interest rates at 14% or higher and 3-5 points on top of that.
High appraisal fees, document fees, and various other fees often accompany hard money loans. There may be an appealing initial interest rate to get you interested, sometimes as low as 7%, but read the fine print. Often the interest increases if the loan is in place for a certain number of months, and can even carry with it points that kick-in every so often.
Most hard money lenders are actually raising funds from another source at a lower rate, then turning around and lending that money at a higher rate. They may use bank funds or private money to raise their capital. They need to charge high rates and points to pay their loan costs and make money. One way or another, they will meet their yield requirements.
Private money is not bank money or hard money. Private money fills the gap between bank money and hard money. Private money lenders are “private” individuals with funds willing to step out and invest in real estate, or in you, to receive a better return than they feel they can get elsewhere. These are typically people within your sphere of influence that have substantial discretionary funds. However, those with smaller bankrolls can be private lenders for your projects as well.
Currently, private money lenders receive about 8-10% on the money loaned. There are no points and no appraisals or any other fees involved. There are no penalties or extension fees. Whatever you and your private lender can agree on is what you will abide by.
Private money is based on personal relationships with those you connect with. Private money lenders do not take out ads online or anywhere else. They seek to work with the people they know and trust.
To sum up:
- Private money is the money you borrow from private individuals to do your real estate deals.
- A private money lender is the person you’re borrowing that money from.