Hard money lenders are those that loan money to real estate investors to fund the purchase of their investment properties on a short term basis. Many investors do not hold on to properties with a long term view toward rental income but rather to fix them up and flip them as quickly as possible. In many cases extra money is needed to complete the sale and do the necessary repair and renovation and the time elements can be as little as a few weeks or a month.
The hard money lenders loan the money using the property as collateral. When the activities of repair and renovation are completed and the property is flipped, the hard money loan is paid off from the proceeds of the sale and what is left is profit for the investor.
Private lenders can be individuals or small consortiums that lend money for short terms. Private money does not necessarily have to come from a stranger; a loan from a family member can fall into this category.
Hard money and private lenders generally charge higher interest rates and fees than the market rates. These types of loans are expensive and the up-front costs can be unusually high. Often these issues are of little importance to the investor who is confident that a profitable deal can be made and these types of loans are often the only way to get access to quick cash.
Many title companies have stopped cross-funding deals so transactional funding is used. Transactional funding is used to fund the first deal in a double closing. If you have a contract on a property which you are planning to wholesale out to another investor, you can schedule a double closing and use a transactional lender to fund your first deal. Usually the second deal closes on the same day at which time the first loan is paid off.
Knowing where to get the right funding for your real estate deals are very important when it comes to investing. When the deals have enough potential profit and low risk to the lenders, investors can turn to hard money lenders, private lenders, or transactional lenders to get the cash they need. In many cases the loan period is no more than a few hours, and even though the cost of this money is high, without it the deal could not be made.