Hard money and equity loans share a lot of similarities. They are both asset-based loans, meaning that they are backed by the value of the real estate property rather than the borrower’s credentials. Both loans are from non-traditional lenders instead of banks or national lenders.
The biggest difference between hard money loans and private loans is their structure. For example:
- Hard money loans have a debt structure where you receive money from a lender. This money is to be used for rehab costs, and you’ll have to pay this amount back plus interest.
- Private loans have an equity structure where you receive money from an investor and agree to share some of the profits with them.
Let’s learn more about these two types of loans and which one is right for your next real estate project.
Availability of Loans
To be competitive in the fix-and-flip industry, you don’t have time to waste when it comes to funding. Hard money is typically easier to find. Because hard money lenders are in the lending business, they market their services and can be found on the internet or through other advertising methods. Private lenders, on the other hand, are harder to find unless you know someone personally.
Flexibility of Lenders
Hard money lenders tend to be flexible because they care most about the asset and not your credit score. As long as you are successful in rehabbing the home and selling it, you can pay back the money with interest and have something to put down on another home. That said, hard money lenders are strict with loan durations and interest rates.
Equity loans can be just as flexible because you are dealing with private lenders. Much of this depends on your negotiation skills and what the lender is comfortable doing. In fact, if you work with the right lender, you might be able to get a longer loan term or less interest compared to hard money. Of course, the opposite is true, too.
Maximizing Your Profits
One of the tricky things with equity loans is that you don’t know how much money you’ll eventually make off the home. If you have a particularly successful project, you’ll end up giving more money away. A lot of house flippers don’t feel comfortable moving forward with a lender when they don’t know what their profits will be and how they will be split.
With hard money, the structure is straightforward. You pay back the money you borrowed plus interest and other fees (i.e., origination fee, processing fees, legal fees). If the rehab goes well and you’re able to flip the home for more than you thought, this goes into your pocket.
While there is no right or wrong type of loan to choose for your investments, hard money does tend to be a more popular option for house flippers. The loan terms are straightforward, the funding is quick and the lenders are easy to work with. If you’re interested in securing your own hard money real estate loan, call First Equity Funding.