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Suppose you want to invest in real estate, but find it difficult to qualify for financing from a traditional lender like a bank. In that case, you could consider alternative lending options like private money loans or hard money loans.
Many investors opt for these types of loans in place of conventional bank loans because of their quick approvals, flexibility, and the ability to borrow up to 100% of the cost of a property. However, before you take the plunge, you need to find the answer to an important question: What's the difference between hard money loans and private loans?
Here’s all you need to know about these two lending options to help you decide the right one for you.
What are Private Money Loans?
A private money loan is funding from an individual or non-traditional lender for investment purposes. Typically, you would get a private money loan from a family member or friend. If you have a solid investment idea, you could also apply for a private money loan from an angel investor.
A private money loan does not involve typical lending institutions like commercial banks and provides a more personal, accessible, and flexible financing option for your real estate investment.
The benefits of private money loans include:
- Access: Traditional lenders like large banks often have stringent and restrictive requirements that could prevent you from applying or getting approval for a loan. On the other hand, the less restrictive requirements of a private money loan make it an attractive option.
- Loan Application: In most cases, the application process for private money loans is easy or non-existent. Instead of spending a lot of time and effort submitting piles of documentation, you quickly get to work securing the property you want to purchase.
- Flexibility: Because private money loans do not have the restrictive terms required by large banks, they provide more flexibility. Unlike traditional lenders who dictate what you can do with the money, private money lenders generally give leeway to spend the money as you wish.
What are Hard Money Loans?
Because they are designed for accessibility and speed, hard money loans are an excellent option if you have a poor credit history or need money quickly. These loans are offered by companies that do not focus on typical lenders' requirements, such as income or credit score. Instead, lenders use the property as collateral for their financing.
The benefits of hard money loans are:
- Efficiency: You can get the money you need quickly, often less than two weeks from the application, unlike loans from traditional lenders that could get stuck in various processing and approvals.
- Accessibility: Approval does not require a consistent employment history or a perfect credit score. By focusing on the value of your investment, a hard money lender can overlook your poor or nonexistent credit history.
- Flexibility: Like private money loans, hard loans give you more leeway and freedom in terms of what you do with the money.
Putting It All Together
Although there are benefits for both types of loan to finance real estate purchases, the type of financing you choose depends on your needs. By understanding the peculiarities of each type of loan, you can determine which option works best for your situation. Always consider reaching out to a professional if you have any detailed questions.
RCN Capital | Connecticut Hard Money Lender
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.