|Private Money vs Hard Money
I interview real estate investors for my website
http://www.reaudiotips.com and recently I came across a
number of investors who teach about using private money to purchase real estate. However, if you would
have asked me one (1) year ago about the difference between private money and hard money I would not
have been able to tell you anything. The difference however is very critical.
Broken down into its simplest form the main difference is with private money you decide the
difference has a lot of impact on your real estate investing business. One type of money is not
necessarily better than the other but you should in fact no the difference.
Where does the money come from?
In both scenarios you are going to receive the money from an outside investor. There are
several ways to discover these investors from holding luncheons to running ads in the local
paper. The investors know that real estate will offer a higher return than the market so they
are inclined to give you some dollar amount in exchange for a percentage of return.
Because you as the investor set the terms exactly how you want. You go to the investor and they
agree to give you X amount of money and in exchange they will be paid X% return. You can
structure this so they receive a monthly return exactly like any lending institution structures
a basic mortgage or you may want to give a higher percentage and pay the investor in one lump
sum at the close of the deal. However you slice it, you decide where to spend the money, when to
spend the money, and how to spend the money. But you do need to have your business set up so
that a third party holds the money until you are ready to use the money. The best part about
using private money is you determine what is done with the money because you are the real estate
investor, you donít have the private money investor watching over your shoulder. In fact, if
using private money I would not even let the private money investor look at the deal. They are
not real estate investors rather they are simply your financial backing.
With hard money the deal tends to favor the hard money investor. The hard money investor lays
down the terms of the deal. Everything from the percentage of return they will make to the type
of deal you can do with the money. If the hard money investor wants you to do a rehab and then
flip the house, well that is exactly what you will have to do. There is nothing wrong with this
scenario if you can get a better deal as a real estate investor and are confident that you will
be able to meet the terms of the hard money investor. Hard money does have its advantages and
can be more useful depending on the deal but it is in each specific circumstance which you will
have to determine which type of deal is better for you, the real estate investor. When working
with a hard money investor it is always important that you have them sign some sort of agreement
so you do not get taken advantage of. For example, if you discover a great investment opportunity
and approach your hard money investor, it is very easy for them to go around your back and make
the deal happen while you are left out in the cold.
Finally, both types of scenarios are very favorable for all parties involved. If a real
estate investor can offer the person who is tired of investing in stocks and bonds and the
volatility of the stock market a way to make more of a return, they will jump at the opportunity.
You will most likely start off slow but once you prove yourself to that money investor, they
will be more inclined to give you money a second and third time down the road, and they will
often be willing to give you more money so you can do bigger deals. Just always be careful that
everything thing is done within the confines of the laws in your area and that you cover your
interest in each deal with good paperwork.
To find out more about using private money for investing and other real estate investing
techniques that can increase your returns and help you grow your business, please visit us at
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