Understanding the Differences: Banks, Hard Money, & Private Lending

February 11, 2023

By John Della Bella, Lima One Capital

Whether it’s a loan for a fix-and-flip investment, capital to purchase a multifamily property as a long-term investment, or a line of credit to expand a rental portfolio, securing financing is a vital element of real estate investing.

Seasoned real estate investors always have the option to leverage one property or investment portfolio to purchase another property. So it’s no surprise that experienced investors growing their portfolios, as well as 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: When it comes to real estate investment loans, some investors choose between turning to banks for traditional loans or to alternate funding sources.

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.

Traditional loans often require a down payment that is likely to be around 20%, most bank lenders require a high credit score and solid credit history, and many bank lenders balk at using W-2 income for borrowers, Generally, this type of loan provides the lowest interest rates of all the loan types we’re discussing, but underwriting documentation will be more intense and will take longer, and borrowers need to be prepared to show liquid assets that equate to six months’ worth of payments.

Also, there is a limit to how many conventional loans one person can have at any one time. Often, investors (especially landlords buying rental property) 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’s why established private lenders such as Lima One cannot be categorized as hard money lenders.
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.

Private Lenders: A private lender, such as Lima One Capital, 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 such as Lima One Capital.

These lenders offer real estate investor loans that offer most of 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 for financing investment properties.

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.

John Della Bella is the Director of Inside Sales for Lima One Capital, the nation’s premier lender for real estate investors. For more information, visit limaone.com.