Hard vs. Private Money Lending

[Rickey Wiley]

Hello BP!

Can someone explain the difference between Hard Money and Private Money Lending when it comes to creative financing? Also, which one is more beneficial for wholesaling and buy n flip?

[Kurt Charles]

@Rickey Wiley From my layperson research, hard money lenders are the alternative to traditional banks. You still need some credit, it varies, but typically in those I research at least a low 600s is needed, you also still need income to debt ratio to be what they need it to be, so the requirements are still a bit high. Interest rates for hard money lenders are also usually between 8% to 12% and in some cases even higher.

Private money lenders can be friends, family or strangers. The rate offered should typically be the same as hard money lenders. The difference is if you are borrowing from private lenders you do not need much credentials, like credit score, etc. However, if the private lender (accredited investor) is not family or friends (strangers) and are single, the SEC requires them to be making $250k or more for the last 2 years or have a net worth of $1 million or more. If it's a couple, they must have an income of $300k or more for the last 2 years combined or a net worth of $1Million or more. If the private lenders don't meet this criteria, it is considered a violation by the SEC.

If you are borrowing from 'family or friends' also called 'sphere of influence', then the income and net worth rules mentioned above don't apply. 

In all 50 states, regardless who is your private lender, you have to sign promissory notes, etc. 

I would speak to an attorney as I am not one, but this information comes from a multimillionaire investor who gave me this information directly. It may be right or somewhat inaccurate, but this is my layperson research.

If you are wholesaling, you might want to look into short term transactional funding if you plan to flip the property right away to another buyer.

Hope it gives you a good starting point. Good luck.