There are more similarities than differences between a hard money loans and a private money loans, or private capital, loans.  The term “hard money” originated years ago and actually referred to funding loans on real estate properties that had a lot of difficulties attached to them.  These loans were hard to do – hence the name.  Frequently lenders would refer to this type of difficult- to-underwrite loan as a loan with “lots of hair.”  In recent times, the term has come to imply that these are loans with hard terms in them; often times expensive and harsh for the borrower.

However, in today’s fast changing world of commercial real estate finance, private money loans are becoming ever more important as banks are being increasingly regulated to death by the various Federal agencies like the FDIC and the OCC.  As banks become unable to fulfill their traditional role as primary lender on commercial real estate, a new area of financing is becoming more important.  This new type of commercial real estate lending is sometimes called the shadow banking community.

Private Real Estate Funding Sources – Private Money Loans

The money for these private money loans comes from hedge funds and other groups that assemble capital for commercial real estate lending.  These types of loans are also called private equity loans, soft money loans or asset based real estate loans.  Today’s commercial borrower can access money from private money loan sources at interest rates that range from slightly above  bank rates (i.e. rates at 6 to 9%) or rates that are more commonly thought of as hard money rates (i.e. 10% to 12%).  There are still lenders out there that are looking for the 13% to 15% rate but they are less common in today’s markets with many more capital providers entering the commercial real estate lending market.

Lenders who are offering more rational rates are tending to shy away from the hard money label in favor of other synonyms.  At the end of the day, the borrower needs to understand that no matter what the name attached, private money loans from private capital sources are likely to be more expensive than loans from banks. But, they can provide the kinds of creative structuring, rapid underwriting and closing response that banks are no longer able to provide.  The wise borrower will not be deterred by the somewhat pejorative term “hard money,” but will shop carefully and choose wisely among the ever increasing pool of private money loan sources that are now available.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.