Understanding the Differences:
Hard Money, Private Lending & Banks
Securing financing is a vital element of real estate investing. Whether it’s a loan for a fix and flip investment, new construction home, capital to purchase a multifamily property as a long-term investment, or a line of credit to expand a rental portfolio, investors need loans to close deals.
Seasoned real estate investors always have the option to leverage one property or investment portfolio to purchase another property. But both seasoned investors growing their portfolios and new real estate investors purchasing for the first time find that working with a lender is the most common way to obtain financing for investment properties.
But which type of lender should real estate investors choose?
If you’re debating between hard money loans, traditional loans, and private lenders, it’s important to understand the differences and how each loan works for your real estate investment strategy. If you’re curious about the benefits of each type of investor loan or which option is right for you, this breakdown will help.
Traditional Loans for Real Estate Investors
When it comes to real estate investment loans, some investors choose between turning to banks for traditional loans or to hard money lenders.
It’s important to note that banks often have specific terms for their loans, and those terms may not be open to negotiation. Using traditional loans for investment properties works differently than for it would for a residential property, and the requirements are different as well.
General Requirements for Traditional Loans
- The down payment is likely to be around 20%.
- Most bank lenders require a high credit score and solid credit history.
- Many bank lenders balk at using W-2 income for borrowers.
- Generally, this type of loan will provide the lowest interest rates of all loan types.
- Underwriting documentation will be more intense and will take longer.
- Borrowers need to be prepared to show liquid assets that equate to six months’ worth of payments.
Note that there is a limit to how many conventional loans one person can have at any one time. Often, investors start with traditional loans but then hit this limit and need to move to finding financing via the loan types we’re about to discuss.
Hard Money Loans
For new real estate investors, a hard money loan can remove the barrier from buying and renovating a property by providing fast and relatively easy access to funds – especially if leverage isn’t an option or they don’t have the capital to purchase properties with cash.
Hard money lenders provide short-term loans using investor assets as collateral. (The term arises from loans based on hard assets, like properties, instead of based primarily on borrower credit.)
Traditional long-term rental loans have a longer approval process that can delay investors. Hard money loans are the opposite.
With a hard money loan, the approval and qualification processes are faster compared to other types of loans – with an approval decision coming in the same day. But this convenience comes with higher rates and fees.
Many hard money lenders have developed negative reputations for inconsistent service along with these high rates and fees. That said, some investors find that hard money loans are an acceptable option for fix and flip investments or investment strategies such as the BRRRR method.
A private lender combines the best parts of traditional loans and hard money loans. Because private mortgage lenders provide business purpose loans that are asset-based, they can move quicker than banks do on traditional loans.
Private lenders are more willing to use W-2 income to qualify borrowers, which makes life easier for real estate investors with irregular income based on completed projects or portfolio cash flow.
While some hard money lenders are individuals or small companies, the residential real estate investment niche has matured with private mortgage lenders like Lima One.
These lenders offer real estate investor loans alongside the speed and convenience advantages that hard money provides, but with more reliable closings and better transparency and service through the process.
Private lenders usually have more capital to deploy and more reliable access to capital than hard money lenders. These are two huge reasons that investors considering hard money should investigate private lenders and especially Lima One for financing investment properties.
Which Type of Real Estate Investment Loan is Right for You?
Real estate investment strategies will vary from investor to investor but working with the right lender is the best way to ensure that your financing options are tailored to your strategy.
Lima One Capital is one of the best lenders in the industry. We offer the best loans for real estate investing from simple bridge loans, rehab and fix & flip financing, and stabilized multifamily loans to the most complex structured finance solutions.
With a nationwide presence as a trusted lender, we offer a robust suite of products designed to help every investor regardless of their investment strategy. As the premier lender for real estate investors, our goal is to help investors scale their business and close deals quickly.