EquityBuild - Jerry CohenThree times in my life, I have used “hard money” in a real estate investment.  Each time it worked out well as I registered a nice profit on each deal.  The fact that I did it twice after the first time is testament to how well it met my needs at that time.  Knowing what I know now, I would have been much better off using “private money.”

Hard money lenders are organized entities that are usually licensed to lend money.  The funds typically emanate from other sources.  As a result, hard money lenders generally have established requirements for lending money.  A hard money transaction will have set periods, set interest rates, and a set number of points that the borrower must pay at the initiation of the loan.  Hard money is most often associated with lending for commercial properties.

Private money is the financing provided for a property from an individual lender or a group.  According to Jerry Cohen, President of EquityBuild, a premier real estate investment firm, “There are two methods for getting started in private mortgages: Mortgage Pools and Direct Lending.  Mortgage pools are like the mutual funds of private mortgages. Each investor's money is pooled with the other investors participating in the pool and the money is used for private lending.

Cohen, who was just awarded the prestigious “Moving America Forward” honor for the success of EquityBuild and EquityBuild Finance, its financial arm, furthered that, “Direct lending is typically reserved for seasoned real estate professionals due to the level of expertise that is needed to identify undervalued properties...”   

Why would I have been much better off with private money from an individual lender or a group rather than hard money?

Private money lending is generally much cheaper and much more flexible than hard money deals.  My loans were short term, but I still had to pay points on each one, even though I had a perfect payment history with the hard money group.  They had their criteria for lending, I wanted to do the deal, so I paid the points.  

Hard money loans cost more as the funding is obtained from private sources.  You have to pay the middleman in a hard money loan, who profits from marking up the cost of the money.  Acting as the middleman, there is also very little flexibility in hard money lending.  Those providing the funds want to know how much it will cost, how much will they make, and how soon will they get their money back.
Nothing wrong with that, it is just good business.

But so is the flexibility of private money, which means a better loan.  Private money, in contrast to hard money, is generally cheaper and much more flexible as you cut out the middleman.  You work directly with the private lender.  The terms can be structured for each deal between the borrower and the private money provider.

I would have been much better off with a private money lender due to my assets and payment history.  But I did not know about private money, at that time.  I was very pleased to find out about hard money, as using it met my needs and allowed for me to book a very solid profit on all three deals.
Had I used private money, however, my gains would have been much higher.  The points charged would have been fewer, too.  Other terms would have been more flexible, based on my borrowing history.  Private money would have easily met my needs, and at a much lower cost than hard money.

Learn from my experience!

by, Jonathan Yates: EquityBuild News Contributor