Hard Money vs Soft Money vs Private Money Lenders and Which is Best for You! - YouTube

Okay, so sometimes you guys email me  questions to [email protected],  

which you're more than welcome to do. It's awesome  because then I'll usually email back and say, Hey,  

I'm going to answer that on a YouTube video  for you. So thank you because someone sent me  

a question asked me, What's the difference between  hard money lenders and private money lenders. So  

we're going to do a video on that today. My  name is April Crossley Welcome to my YouTube  

channel. I'm a real estate investor in Berks  County, Pennsylvania, we flip houses here, we  

buy multifamily properties, and we do a little bit  of private lending. And today we're gonna go over  

the differences, the main differences between hard  money lenders, hard money lenders, excuse me, and  

private money lenders. Okay, so let's get started.  So I created two fancy columns for you on my fancy  

paper with my fancy markers. And so we can compare  and contrast hard money lenders to private money  

lenders. So the first major difference is hard  money lenders are companies this is all they do is  

lend out money to other people. And they typically  have a lot of capital. Capital is a fancy term  

that people like to use, that just means money,  they got a lot of money, okay, a lot of money. So  

that's I like to interpret those swanky terms  for you on my YouTube channel. But hard money  

lenders are a business with a lot of capital.  Private money lenders are individuals like me,  

and the people that usually lend to me or private  money lenders, or just everyday people that have  

IRAs that they want to make more money on, or they  have money in stocks, and they want to move it to  

real estate, or they just have a lot of money in  savings, it's not making them a good return. So  

they want to lend it to another individual that  flips houses are buys rentals. So private money,  

lenders usually have a limited amount of funds,  hard money, lenders can fund more expensive deals,  

because they have a ton of money, lots and lots  of money. So if you are in a market where it costs  

you $350,000, just to buy the house, and then  another $250,000 to renovate the house, you're  

probably going to use a hard money lender because  they have a lot more money. In my market, we're  

usually buying a house for like 50,000 70,000  100,000 and then putting 35 to 55,000 into it not  

a ton of money. Usually a private money lender has  a good amount of money that they can do that deal.  

So for more expensive deals, you're probably going  to use a hard money lender. The other difference  

is hard money lenders typically charge points.  Private money lenders, sometimes charge points.  

Usually not really. Points are basically when  someone says 1.1 point is 1% of the loan amount.  

Okay, so they're collecting points up front, but  by upfront I don't mean before you close the deal,  

I mean at the closing table, so if you take  anything away from this know whether you're using  

a hard money lender or a private money lender, no  money is exchanged, until you're at the closing  

table. So never give anyone money up front, okay?  Because you're being scammed don't like wire  

someone money, okay? Especially if they're from  a foreign country, and they're emailing you or  

randomly soliciting you on Facebook. Okay. So hard  money lenders typically charge points, which are  

1.1 point equals 1% of the loan amount, and it's a  sum of money that they're collecting at settlement  

in fees. Hard money, lenders also usually only  do short term loans by short term loans. I mean,  

like a six month loan on a flip project, private  money lenders, they'll do short term loans,  

but they're also more open to doing long term  loans. So say I buy a rental property and I go to  

a private lender and say I have two options, I can  get a loan with a bank, or I can get a loan with  

you and you can hold the loan for one year or two  years or three years or five years. Private money  

lenders sometimes like to hold a loan for a longer  period of time. They also do it on flips where  

their money is in a deal than out of the deal than  in the deal and out of the deal. Okay. hard money  

lenders don't usually do long term and usually  don't want them to do long term because they're  

more expensive. We're going to talk about that in  a second. So they usually only lend on flips. hard  

money lenders typically have higher interest rates  than private money lenders. Private money lenders  

are typically more reasonable the rates aren't  as high. So private money lenders, you might see  

rates a 10% 12% 13% No points. hard money lenders  are probably going to see rates of 14% plus  

another percentage point, or 16%. Someone told me  the other day they were getting charged 18 or 20%  

or so. One thing that I was like That is crazy.  My home money lenders are at 10. But they've been  

with me a long time. So it sometimes takes a  while to get to that reasonable rate. I know  

guys that are getting in at less than that. The reason hard money lenders charge higher rates  

is because the deal is riskier to them. It's  riskier, because they're a business. This hard  

money lending company might be in California,  and you're doing a flip project in Pennsylvania,  

they don't know you, they don't know your  market. They're not here on the ground,  

checking it out. So there's a lot more risk  for them. Because there's a lot more risk,  

they charge a higher interest rate. Private money  lenders, if you're subscribe to our channel, you  

see all the videos we do on private money lending,  we're huge on private money lending, private money  

lending, you know from watching those videos is  a relationship based business. These people know  

you, they typically have met you at a real estate  investment meeting. They've met you for coffee,  

they've seen you in the real estate circles, and  they know your market. Most of my private money  

lenders are living right in my backyard. Okay,  they're not really living in my backyard. You  

know what I mean? They're living in my market,  they're living in my area, they know the market,  

I'd be super creepy if they were living in my  backyard. They live in my market and they know  

my market. So they're giving me a better rate  because there's less risk if they want to drive  

by the property or go walk through the property at  any random time they can. I always give them the  

lockbox combination. Here's the lockbox combo you  want to go waltz through it, go waltz through it,  

go talk to the contractor, whatever you want to  do. So there's less risk because they know you,  

this company doesn't know you from Adam,  you're like filling out a form online,  

send it to California, they're like, oh, their  headshot picture looks like I can trust them.  

They don't know you that menu for coffee.  This guy has so very relationship based Okay,  

much more reasonable terms. Because of that. Hard  money. Lenders also charge a lot of miscellaneous  

fees that private money lenders do not I'm  not saying they won't ever, but they rarely  

do okay? hard money lenders like to charge draw  fees, draw fees are anytime they send you money,  

like we did a previous video on private money and  how they break down giving you the purchase price,  

and then how they give you the rehab funds, make  sure you subscribe and go back and watch that  

video. But they'll charge you a draw fee every  time they give you rehab funds. So in that video,  

I think it was 12,500 and rehab funds. If that  was a hard money lender, they would charge me a  

fee for writing that check. Then when they gave  me the second draw, they charge me another fee  

for that second draw private money lenders don't  Okay. They also charge inspection fees. So you'll  

do the first part of the rehab. And when you're  ready for the second portion of rehab money,  

they're gonna send someone in the area out to the  property to inspect it and take pictures and you  

sending them pictures, not good enough, they're  gonna send someone out to inspect it, my lenders,  

I send them pictures weekly, it's good enough for  them that I'm sending them pictures because they  

can drive by anytime they want. They're going to  charge them an inspection fee. When they send that  

guy out. They're also going to usually charge an  appraisal fee, the one and appraisal done on the  

property, my private money lenders, I send them  comps and I fill out like a deal package for them.  

And for them, that's good enough sending them  comps, these guys don't know the market, they want  

a professional appraiser to go out and appraise  the property might cost you like four or 500 $600  

depending what they charge you. They also charge  broker fees, that's a fee where you send your deal  

in to them. And they're basically matching you  with money for that deal. brokering that money. So  

they're charging that broker fee to you. It might  not seem like a lot, but it adds up to a lot. The  

I've seen these fees, killed deals, because a lot  of investors don't ask hard money lenders what  

their fees are. And then during the transaction,  they're getting charged all these fees. And at the  

end of the transaction, they're like, holy shit,  I spent 1000s Just on fees, it really can come out  

to that much so know your fees upfront if you're  using a hard money lender because they will be you  

out the wazoo. They also like you to have skin in the game. People love this term, have to have  

skin in the game and you have to have skin in the game. skin in the game just means they want  

you to put your money towards the deal. They want  you to have some money in the deal. That's what  

skin in the game means. So you have to put money  towards the deal. Private money lenders are more  

likely to be flexible and fund a lot more of the  deal meaning they might fund 100% of the purchase  

price and 100% of the rehab and the closing costs.  If the deal makes sense. And you're under that  

70% of ARV to protect them, or they might joint  venture with you if you're new where they bring  

all the funds and you oversee the project. They're  just is a lot more flexible, they don't require  

as much money from you hard money, lenders are  going to come back to you and say, we'll fund  

the purchase price, but not the rehab, or we'll  fund the purchase price. And we'll fund the rehab,  

but not till the rehabs done at the end, and  you're like, Thanks, buddy. So I gotta come out of  

pocket with it anyway, you're basically reimburse  me back, but I don't have any money, which is why  

I don't want to kind of pop it in the first place.  You see what I'm saying? They just didn't make  

sense. So the one you don't have like, sometimes  we'll say 20% of your money into the deal or  

10% of your money. So they want you to have a  lot more money in the deal than private money  

lenders who are a lot more flexible. So if you're  following my YouTube channel, you already know  

I love private money lenders. I love them and I love raising  

private capital and we work with a whole bunch of  private money lenders. I love them way more than  

hard money lenders. And now you hopefully have a  clearer picture of why because I don't like fees  

and people that charge me fees because it takes  away from my profit. And I like the personal  

relationship that you have with private money  lenders. Okay, so I hope this helped you guys  

out today. Thank you too. Whoever sent me  the question asking me about the difference  

between hard money and private money lenders.  If you guys have any other questions that you  

want me to do a video on you can email them to  me [email protected] You can also follow  

us on Facebook Lazy Girl Real Estate Investing.  You can follow us on Instagram April Crossley  

y, and how else? Here's one on the  way. Oh, you can check out our website  

www.lazygirlrei.com Thanks, guys. Transcribed by https://otter.ai