Investors make up about one-sixth of the current real estate market. Investor activity rose by 15% between the first and second quarters of 2021.

Many real estate investors are trying to take advantage of a hot real estate market. Others are looking to diversify their investments since the stock market is so volatile.

If you want to jump into the world of real estate investing, you need to get your financing in order before you start shopping for properties.

You’ll come across a lot of terminologies, such as private money and hard money. These are a couple of ways to obtain financing. What’s the difference between the two?

Read on to discover what private lending and hard lending are and the differences between the two.

What Is Private Money?

The terms private lending and hard money lending are thrown around real estate investment circles. They’re often used interchangeably and there isn’t a clear definition of what those terms really mean.

In very general terms, private money loans are financed by private individuals or organizations. They’re sometimes called peer-to-peer (P2P) loans.

These loans can be funded by a friend, relative, or private investment company.

Private lenders tend to be advantageous because you can negotiate terms that work in your favour. These lenders generally don’t require a lot of documentation or a minimum credit score. You can use private loans for rehab, where you usually can’t with other types of loans.

Private lenders do have higher interest rates. The loan period is shorter than a conventional loan. Before you accept private lending, think about the negative implications it can have on your relationship.

What Is Hard Money?

A hard money loan is one where the interest rate and loan amount get determined by the value of a hard asset. The real estate property you want to purchase is a hard asset.

Hard money lenders operate on a level similar to banks in that you have to meet certain requirements to get a loan. The real estate asset is also used as collateral, where it isn’t in private money loans.

Hard money lenders are willing to fund projects that banks shy away from. This can be a good option if you can’t get traditional financing.

Private hard money lenders are organizations that have the flexibility of a private lender with the standards of a hard money lender.

Both private and hard money lenders aren’t bound by the same financial regulations that traditional banks have to comply with. They do need to comply with federal and local lending laws, though.

The similarities don’t end there. You can obtain bridge loans through private lenders, banks, and hard money lenders. Bridge loans are used to bridge a financing gap in a project.

For example, you can fix and flip a property with a bridge loan. A loan is a short-term loan that you pay back when you sell the property.

You might have another property that you want to buy and can’t wait to sell another property to finance the transaction. A bridge loan helps you finance the new property purchase.

How to Get a Real Estate Investment Loan

Now that you understand the basic options for real estate financing, you need to know how to go about getting a loan.

Start by getting your finances in order. You’re going to need a down payment, which is about 15% of the purchase. You might be able to negotiate a lower down payment for the loan with a private lender. If you’re having trouble coming up with the down payment, a private lender could loan the money for that purpose.

You also need to have enough cash on hand to cover the closing costs. If the property is a rental property, you need to make repairs before you rent it out.

Don’t forget to budget regular maintenance costs of the property. Add a contingency budget, which covers unexpected issues.

Lenders want to make sure that you have a stable source of income. You’ll want to gather your documents to show your income, whether you use W-2 forms or other investment income.

Assess the Property

Your real estate investment is a business. You have to show investors that the property is profitable. This exercise protects you from bad investments as well.

Calculate how much you think you can rent the property for. Look for similar rentals in your area and use the average price as an estimate. Calculate what your rental income will be for the year.

The estimate your operating expenses. These include maintenance, advertising, taxes, utilities, garbage, and insurance. Again, come up with an annual amount.

Subtract the annual operating expenses from the rental income. That’s your net income.

Divide your net income by the mortgage loan amount. You have your estimated return on investment.

What’s a good ROI to target? Some investors target an ROI as high as 10%-12% for rental properties. You should target about 7%.

Find Your Financing Path

As you learned earlier, there are plenty of ways to finance your real estate investment. You have to assess your situation and decide which one is right for you.

You might like the flexibility that private lenders offer, but you want the security that hard lenders offer. Private hard money lenders tend to offer the best of both worlds.

Private Money vs. Hard Money Lenders

Real estate investing is a different world than a regular residential real estate purchase. It helps to understand that you have more financing options than traditional banks offer.

Private money and hard money lenders are common in real estate investing. Both offer more flexibility and better terms than traditional lenders. They’re both great options for your real estate investment.

Material Disclosure Notification serves solely as a bridge between borrowers and a network of lenders. We do not create loan agreements, make credit evaluations, or handle loan brokerage. Our platform does not impose service fees on users and is not an advocate for any participating lender of short-term loans. When you submit a request for a loan through our system, we facilitate the connection to independent lenders but do not assure a loan proposal will be made. Approval for a short-term loan via our website is not guaranteed. Lenders may perform credit inquiries with credit reporting bodies or receive credit reports from other sources. Lenders may request reports from major credit bureaus like Equifax, Experian, and TransUnion, or they may use other alternative credit information sources. Use of our website is entirely voluntary, and you are not required to engage with any lender or third party nor enter into a contract. The information provided here is for educational purposes and is not to be interpreted as legal counsel.

Clarification on Agency Role Please be advised that is not a lending institution, does not issue loan offers, and is not engaged in the online loan brokering to lenders. We do not act as an agent or as a representative of any lender, nor do we take part in making credit decisions. Submitting a loan inquiry through our platform does not ensure that you will receive a loan offer or be approved for a loan. Some participating lenders might ask for documentation to be faxed. In certain cases, it might be necessary to visit a physical location to finalize your loan request process. Should you have queries regarding your loan, it is recommended to contact your lender directly.

APR Notice

State regulations may cap the Annual Percentage Rate (APR) that lenders are allowed to charge. APRs for different types of loans vary significantly. For cash advance loans, APRs may range from 200% up to 1386%, for installment loans the range is 6.63% to 485%, and for personal loans, APRs can be from 4.99% up to 450%, with variations depending on the lender. In states without APR restrictions or when borrowing from banks not subject to state regulations, the APR may be higher. The APR represents the annual cost of your loan, taking into account the total charge, the loan amount, the loan duration, repayment schedules, and the timing of payments. Before finalizing a loan agreement, lenders must disclose the APR and other loan terms to you by law. Please note that APRs are variable and may change.

Disclosure of Operations

This website is operated by a company that is not a direct lender, loan broker, or a representative of either. Our role is as a marketing referral service working with various lenders who may offer loan amounts ranging from $100 to $1,000 for cash advance loans, and even up to $35,000 for personal loans. The maximum amounts may not be available from all lenders, and there is no certainty that you will be matched with an independent lender who can meet your borrowing needs. This platform does not make loan offers but rather connects users with lenders. We do not charge for any product or service, nor do we represent any lender. Compensation may be given to us by lenders for advertising their services. We do not have any influence over lender actions and do not have access to full loan details, including APRs. Your lender is the best source for information about your loan terms, rates, fees, repayment schedules, and the implications of missed payments. Your registration details submitted here will be forwarded to one or more lenders. You are not required to engage our services to make contact with a lender, apply for credit, or accept a loan. Each lender's money transfer and repayment terms will vary, and state and local laws may govern repayment terms. Some lenders may require faxing of documentation. Please consult our FAQs for further information on credit and payment delays. These disclosures are informational and should not be considered legal counsel. This service's use aligns with this site’s Terms of Use and Privacy Policy.

Service Exclusions

Certain state residents may not qualify for short-term, small-dollar loans. Specifically, those from Arkansas, New York, New Hampshire, Vermont, and West Virginia are not eligible to use this service. The states where this service is available may change without prior notification.

Credit Considerations

This website’s operator is not involved in making credit decisions. Lenders you may connect with through this service might perform credit checks with credit reporting bureaus or obtain alternative reports to assess credit history, credit standing, and credit capacity. By submitting your details, you consent to allow lenders to verify your information and check your credit as needed. The loans offered by lenders in our network are intended for short-term financial relief and are not long-lasting financial solutions. Only take out a loan if it can be paid back by the upcoming pay cycle. For long-term financial health, it's advisable to seek out professional financial guidance. Failing to repay loans on time may result in additional fees or collection activities. Every lender sets their own policies, so please review them for more information. If you do not repay your credit as agreed, lenders may pursue collection actions. Each lender's policy on loan renewal varies, so it's important to read and understand their terms.