Hard Money vs Private Money Loans: What Is the Difference?
Hard money and private money loans are both short-term loans that real estate investors use to buy and renovate property. In both cases the lender cares most about the property: what it is worth now and what it will be worth after the work. That is where they differ from a conventional mortgage. The difference between the two terms is mostly about who is lending and how formal the process is.
The short version
- Hard money usually means a company or fund that lends on a repeatable program with set terms.
- Private money usually means an individual or small group lending their own capital, often through a relationship, on terms negotiated deal by deal.
In practice the terms overlap. Plenty of professional lenders call themselves private lenders, and plenty of individuals use hard-money-style terms. What matters is the specific terms on the table.
How they compare
| Hard money | Private money | |
|---|---|---|
| Typical lender | Company, fund or professional lender | Individual, family, friends, network |
| How terms are set | Program with published or standard terms | Negotiated deal by deal |
| Decision based on | The property, the plan and the borrower’s experience | The property, the plan and the relationship |
| Documentation | Formal, standardized | Varies; should still be fully documented |
| Flexibility | Within the program’s rules | Potentially higher, depending on the lender |
| Cost | Usually higher than a conventional loan | Negotiated; can be lower or higher |
Both are generally short-term, often interest-only, and often charge points (a percentage of the loan paid up front). Rehab money is commonly held back and released in draws as work is completed.
What lenders look at
Lenders typically size a loan with three measures and lend the lowest of the resulting amounts:
- LTV (loan to value): loan as a percentage of the property’s current value.
- LTC (loan to cost): loan as a percentage of the purchase price plus the rehab budget.
- ARV percentage: loan as a percentage of the after-repair value.
Lenders also consider the borrower’s experience, the strength of the rehab plan and the exit (selling or refinancing). The fix-and-flip loan sizer shows how these caps interact: enter a deal and your own caps, and it shows the maximum loan, the initial advance, the rehab holdback and which cap is binding.
How to compare two offers
The interest rate is only one piece. Line the offers up on:
- Rate and whether it is interest-only
- Points and fees at closing
- Term and extension options, including the cost of an extension
- Draw process: how rehab money is requested, inspected and released, and any fees per draw
- Prepayment terms: whether paying early costs you anything
- Default and late terms
- Total cost over the time you realistically expect to hold the loan
A loan with a lower rate but slow, expensive draws can cost more in a real project than one with a higher rate and a smooth process. Build the numbers with realistic timing, using a solid rehab budget (here is how).
If you are the lender
Whether you lend through a company or with your own money, a few habits keep deals clean:
- Write down the terms and have an attorney review the documents; lending rules vary by state.
- Size every loan from stated caps, so each deal is consistent.
- Define how and when rehab money is released.
- Decide in advance what happens at maturity: payoff, extension or default.
If you are the borrower
- Ask for the full list of costs, not just the rate.
- Ask how long draws take and what the inspection process is.
- Plan your hold time with a cushion, because extensions cost money.
- Know your exit before you close.
Hard money, private money, or something in between: the right loan is the one whose full cost and process fit your project.
This article is general education, not legal, tax or lending advice.