What’s the Difference Between Private Money and Hard Money?

OK. So, what's the difference between hard money and private money? In real estate investing, the terms Private Money and Hard Money often need to be clarified, leading to confusion. Today, I would like to highlight this distinction because I often hear the terms used interchangeably and frequently by people who should know better.

Understanding Hard Money Lenders

When discussing hard money lenders, we typically refer to companies organized to offer short-term loans to real estate investors. While these companies are almost always privately owned, they operate more like a bank's loan department. They will almost always have a website, a public office you can visit, a customer phone number, a sales or loan origination person (or team), a separate underwriting person (or team), a loan servicing person (or team), etc. Any investor can apply to borrow money from them without knowing anyone who works there. Not that there aren't exceptions to this definition, but this generally describes the look and feel of a typical hard money lender.

Private Lenders: The Truest Sense of the Term

On the other hand, a private money lender is simply an individual with private capital willing to lend to a real estate investor to purchase real estate. Private lenders often leverage savings, retirement funds, or other accessible capital. Many private lenders are professionals, such as doctors, dentists, or attorneys, who, due to high-paying full-time jobs, have accumulated substantial savings and are looking to generate better returns than in other investments like the stock market. Other private money sources usually come from the investor's personal or professional network, such as a family member, a neighbor, a friend from childhood, etc. Unlike the hard money companies, they don’t have offices, websites, or employees, and private money lenders only usually lend to people they have gotten to know, at least a little bit.

To Further The Confusion

Adding a layer of complexity, hard money lenders frequently fund their deals by raising capital from private lenders. A typical scenario unfolds when a real estate investor applies for a fix-and-flip loan with a hard money lender. In many cases, the hard money lender borrows some or all of the funds from a vetted private money lender at, let’s say, 10% interest and then lends it to the investor at a higher rate, say 12% or 15%, thereby profiting from the interest rate difference. Hard money lenders often charge the investor-borrower additional “points” or fees to cover their business operating costs. This ultimately makes the cost of money from hard money lenders higher than if the investor had used his personal or professional network to borrow from a private lender.

In summary, while it’s accurate to say that hard money can be considered a form of “private money,” it's generally not correct to say that borrowing private money is the same as a "hard money loan."