Property development relies on access to capital but private money and hard money myths sometimes get in the way.
Private money and hard money are common sources of funding and particularly popular for developers who need more flexibility and creativity than what is available from more traditional bank loans.
But common misconceptions can lead to some big missed opportunities.
Here are some of the private money and hard money myths to blame.
Myth: Private money and hard money are the same
Both are non-traditional forms of financing but they are not the same.
Private money comes from individuals – family, friends or private investors who lend money based on their own terms.
Hard money is derived from professional lenders who provide short-term loans guaranteed by real estate.
They usually come with higher interest rates and stricter terms.
Myth: Only desperate developers use hard money loans
Hard money loans are a strategic tool rather than a last resort.
They are used and often preferred by experienced developers who need fast, flexible financing, especially in competitive markets or when traditional financing is unavailable.
They can be ideal for flipping properties, quick purchases or undertaking complex projects that do not satisfy the criteria or risk levels of traditional lenders.
Myth: Hard money lenders don’t care about credit scores
It is true hard money lenders are mostly concerned with the value of a property and the developer’s exit strategy.
But they still take into account the borrower’s credit history.
A higher credit score generally leads to better terms although the primary focus will be on the asset and the developer’s experience.
Myth: Private money is always easier to obtain than bank loans
Private money is usually more flexible than bank loans but it is not necessarily easier to obtain.
First, you need to find a private lender willing to invest in your project.
This itself involves a level of trust which in turn often relies on having already built a strong relationship and displayed a proven track record.
Then you need to satisfy the private money lender’s own rigorous criteria.
Myth: Hard money lenders don’t care about the developer’s experience
As with private money lenders, hard money lenders are primarily interested in the value of the property.
But they also consider the developer’s experience.
Experienced developers with a proven track record are more likely to be offered favorable terms because it reduces the lender’s risk.
Myth: Hard money loans have hidden costs
Hard money myths don’t come much wilder than this one.
Most hard money lenders are reputable businessmen who come from a wide range of fields.
They may be attorneys, investment bankers or even real estate moguls.
Sure, hard money loans have higher fees and interest rates than bank loans.
But reputable hard money lenders are transparent about their terms and conditions at the start of the loan process.
Just like any loan, it is in the borrower’s interest to read those terms carefully before proceeding.
The total cost of a loan can then be understood from the start, with the full context considered.
Myth: Private and hard money loans are too expensive
There is no doubt the fees and interest rates on these loans are higher than traditional bank loans.
But they can also be very cost effective in the right circumstances.
For example, most developers who want to flip properties quickly usually find the cost of a hard money loan more than justified.
That’s because it gives them faster access to capital and greater convenience, ultimately leading to higher profits.
Also, let’s not forget that the lower interest rates offered by traditional lenders are long-term, often up to 25 years.
While for hard money and private money, loans are usually completed within five years (At Equidy, most projects are wrapped up within three years).
Myth: You can only use private or hard money for distressed properties
This is another one of the crazy private and hard money myths.
It is true that these types of loans are often used for distressed or quick flip projects.
But they can also be used for any number of other real estate developments.
These include new constructions, land developments, bridge loans and even short-term financing for more conventional properties that don’t qualify for a traditional loan.
Myth: Private money is less regulated and therefore riskier
Private money is certainly less regulated than traditional bank loans.
But that doesn’t necessarily make it riskier.
Again, it boils down to the source of the private money and ensuring the terms and conditions are legal and fully understood.
You wouldn’t go into business with anyone without doing due diligence – the same holds true when borrowing money.
Nor would you proceed with a multi-million dollar development without having a contract reviewed by an attorney.
Myth: You can’t refinance a hard money loan
Many developers use hard money loans as a bridge to quickly acquire or flip a distressed property with the intention of refinancing to a lower cost, longer term loan at a later date.
As long as the property increases in value and the developer meets the requirements of traditional lenders, refinancing is often a viable strategy.
Get advice today
Before embarking on your property development project, it is important to fully understand all of the financing options at your disposal.
This includes dispelling some of the more common private money and hard money myths to ensure you take advantage of the loan that works best for you.
But with so many types of loans at your disposal, it can quickly become overwhelming.
That’s where Equidy can help.
At Equidy, our founders have an intimate and personal history in property, covering all aspects of real estate and property development in California for more than 40 years.
We back you to build your property empire, providing the fuel for your wealth creation ambitions.
But we are much more than just a finance facilitator.
We will work creatively with you every step of the way, providing all of our extensive knowledge and support to help your project take shape.
We enjoy long and established relationships with experienced investors, entrepreneurs and real estate professionals while leveraging our reputation and trust and using clear communication to minimize the risk to all parties.
Take just a few minutes to apply now for finance or book your free strategy call.
