When you’re looking to fire up a project in the real estate industry, a lot of options are available to you when it comes to acquiring financing for your project. It’s important, however, to know as much as you can about all of your options in order to choose the financing option which fits your project best. While you probably already know how strenuous traditional financing can be to secure, let’s take a look at the differences between two alternative financing options: private loans and hard money.
Private financing is a broad term applied to essentially all methods of project financing which do not go through a bank or credit institution. This includes, confusingly, hard money loans. Despite hard money technically being a form of private financing, in most considerations, “private lending” refers directly to a single person who has a lot of money which they lend out to another single person in order to fund their projects. This single-person-funding strategy is often expressed as the “I know a guy” strategy.
Hard money loans, while technically a type of private financing, are loan packages put together by non-bank lending institutions with the expressed purpose of financing real estate projects. These loan packages are designed around the utilization of collateral or a hard asset. In real estate financing, hard money loans are levied against the value of the property in which the investment is being made. Hard money loans may be issued to any potential investor who meets the criteria which the lender has established within their business practices.
While “knowing a guy” can feel like a powerful way to fund your projects, there are some implicits risks to relying solely on private loans. Some of those risk include:
- Running out of money: When a singular lender offers to finance a project for you, there is a lingering chance that that person will run out of money while your project is ongoing. Personal finances are highly liquid and cannot always be guaranteed throughout the length of your project.
- Collapsing personal relationships: When investors deal with a personal private lender, chances are good that they have an established relationship with said lender. If something happens which impacts the relationship which you have with your lender, they can elect to pull lending for your project
- Private lenders can micromanage: Some individuals who offer financing to friends and family use their beneficiaries as muses for the fulfillment of being a real estate investor themself, without the business risks. This can lead to your private financier applying pressures to your decision making process; solicited or not.
- Lowered legal protections: Securing funding through more formal channels can feel like a lot of unnecessary work, but some of that work is for your protection, too. Drawing up contracts with your loan officials helps you to know that your financing will come through. When dealing with private lenders, there is a much lower chance that your financing will be contracted, meaning that if that lender wants to cut you off, they can.
While it’s fun to “know a guy” who can help fund your real estate investment projects, hard money lenders like EMCAP are eager to work with you to develop a successful financing solution which explicitly outlines when and how you will receive your financing throughout the length of your project.
Looking to finance your next real estate investment? Come see how the experts at EMCAP Lending can make your goals a reality. With decades of experience and tens of millions of dollars of transactions successfully completed, EMCAP Lending is here to work with you. To learn more, contact us today; or, pre-qualify for your loan in minutes!