Private Money Vs. Hard Money Vs. Buddy M...

Hey guys – Cody Sperber here. I’m back again with another great lesson. I want to help you to have a clear understanding of the differences between private money, hard money, and what I’ve come to call, Buddy Money. More on the Buddy Money subject in just a minute…

Through the years, I’ve found this to be a big source of confusion for newer investors. Not just how each one works, but also when is the best time to use one or the other. Sometimes these definitions are blurred. So today, we’re gonna take a look.

First of all, let me say that I remember when I was a newbie investor – the amount of information that I was trying to learn was overwhelming. It was tough to keep everything straight in my mind. This is one of the reasons why I so enjoy coming to you with these lessons. I want to break it down for you in easy-to-digest and understand bits.

So, let’s dig in. We’ll cover:

The different types of funding for your deals
Clarify the definitions
Understand the advantages and disadvantages of the three types of funding

Once you are armed with this information, you’ll be ready to use the right one at the right time.

Hard Money

Hard money lenders are not hard to find. Your local REIA club will for sure have a list of lenders in your area. An internet search will bring up even more. As you network and get to know other investors, you’ll soon have referrals as well.

These lenders are strictly in business as a lender. That’s what they do. While it may be good to have a relationship with a hard money lender, it’s not as important as, say, your relationship with your Realtor.

The hard money lender is interested more in the property – in the deal – than he is about you and your financial history. In other words, this type of lending is asset-based.

They want to know what the property is worth, and they want to make sure they’ll come out good if the investor has made a mistake. Additionally, they require first position on the Deed of Trust.

Investors who turn to hard money lenders see these loans as short term – possibly six months or less. The interest rate could be 12% with points on the front end. If there are no points, the interest rate could be as high as 18% to 29%.

Private Money

Seeking a private-money lender is much different. This is a person who might be a friend, or a relative, or even a friend of a friend. This is a person who has lazy money that’s bringing them low returns.

money Unlike a hard money lender, these are not professional lenders, and they’ll probably not be knowledgeable in real estate investing. They understand enough to know that it can bring a good return if handled correctly. Usually a private investor simply doesn’t have time to get into real estate investing on their own – and they likely don’t want to.

You, as the investor, will offer to pay an interest rate of between 7% and 15%. This is typical for the first Trust Deed position. If they take first Trust Deed position, the rate will be higher since they’re accepting more risk.

It’s best to locate these private investors before you ever need one. If possible, have a sit-down meeting to explain how everything works. Explain how you have so many more deals than you could ever fund on your own. You want them to earn higher returns on their money; and you also want to do more deals. You’ll also point out that their money is secured by the real estate itself.

While you won’t need their money at the time of this initial visit, let them know that good deals don’t stay around long, which means they will need to be ready to move quickly. The very reason that you handle such hot deals at such a great price is because you can move quickly and pay cash – their cash.

Make contact and build a relationship with these people. Trust will be a determining factor whether or not they will work with you. Emphasize the point that you’re not personally borrowing money from them. Their investment always goes through the closing and is put on the HUD. The closing agent deals with all those funds; you never touch it.

Buddy Money

Now we come to the third in the list – Buddy Money. So, what the heck is buddy money? In this situation, you are not borrowing from anyone. Instead, you’re partnering with a buddy.

A lot of investors don’t understand why they should even consider this as a way to finance a deal. Generally, when you do a joint-venture, you’ll be giving up a hefty chunk of your profits – maybe up to half.

buddies But for new investors who are struggling to get private or hard money (especially early on in the game), partnering may be the best way to get the deal done. Yes, it’ll cost more of your profits… but on the other side of the coin there’s a lot less risk on your part. You’re now sharing the risk with this buddy partner.

If you do the legwork and bring the deal to the table, and they bring their experience and their capital to the table, you can make some beautiful music together. You are now able to get deals done that will:

a) Begin to build your track record, and will give you more credibility to work with hard money and private lenders later on down the line.

b) Get some cash in your pocket so that you can leverage yourself further up and further in.

Hard Money? Private Money? Buddy Money?

Now that these three ways to fund your deals have been made clearer, the next question is how to know what to use and when. Right?

If the deal makes sense and you need to move quickly to snag it, hard money lenders are the answer. In spite of the fact that the money will cost more, if it means the difference between working a deal and losing a deal, then this is the way to go.

On the other hand, private money can be thought of as long-term money. It doesn’t have to be a quick, short-term deal; it’s possible to negotiate private money out to three years – or even 10 years. It all depends on what you and your financial investor agree on as the right terms.

Both hard money and private money lenders are considered asset-based. In other words, they are not basing their decision on you so much. Yes, there may be trust involved, but they probably will not be checking your credit or asking for you to sign a personal guarantee.

Buddy money – bringing in a joint-venture partner – will always have its place in your investing business. This type of funding will become especially attractive when you’re a newbie. But even today, after all the years I’ve spent in the investing business, I still partner with other investors when the deal makes sense. So don’t discount buddy money as a way to fund your deals.

Chime In

Have you used any of these three funding opportunities? If so, which ones, and how did it work out for you? Chime in by leaving your comments below. We want to hear from you.

Do your research to find out the well-known, trusted hard money lenders in your area. Ask other investors for referrals.

Make a list of possible private money investors in your sphere of influence – friends, business associates, relatives, etc. Talk to them now – before you need them.

Keep your eye out at your local REIA meetings for successful investors who may be a great candidate as a source of Buddy Money. Develop a relationship to learn if they might be interested in doing a joint-venture deal with you.