Private money vs hard money: individuals, funds and what each expects

Both lend against real estate outside the banking system. The difference is who is on the other side of the table — and that changes the price, the paperwork and the risk in both directions.

Definitions that actually hold

Hard money lenders are professional lenders — companies, funds, platforms — with published programs, underwriting guidelines, licensing where required, and repeatable processes. Private money lenders are individuals (or small groups) lending their own capital: a retired contractor, a self-directed IRA holder, a family member, a successful investor recycling profits. The line blurs when a private lender becomes prolific enough to look like a business.

Side by side

	Private money	Hard money
Source of funds	Individual’s own capital, IRA, trust	Fund, warehouse line, investor capital, securitization
Pricing	Negotiated; often 8%–12%, sometimes profit share instead of points	Published tiers; 9%–14% plus 1–4 points
Leverage	Flexible; can fund 100% for a trusted borrower	Program limits (LTC/LTV caps)
Speed	Can be days — or weeks if the lender is not ready	Consistent 1–3 weeks
Paperwork	Varies; sometimes dangerously thin	Standard note, deed of trust, guarantee, draw agreement
Draws	Informal, often faster	Inspected draws with fees
Capacity	Limited to the individual’s liquidity	Scales to many loans
Legal risk	Usury, licensing and securities issues if structured carelessly	Handled by the lender’s counsel

Raising private money properly

Three rules. First, document it like a bank would: promissory note, recorded deed of trust or mortgage, lender’s title policy, the lender named on the hazard insurance. A handshake loan protects no one. Second, respect usury and licensing in the state where the property sits — an individual lending at 15% in a state with a 12% cap on loans to individuals can lose the interest or worse; lending to an LLC often changes the analysis. Third, do not accidentally sell a security: pooling several people’s money into one loan or fund, or promising returns to passive investors, can be a securities offering requiring exemptions and disclosures. A real estate or securities attorney for the first structure is cheap insurance.

Which to use

Private money shines for gap funding, second positions, deals too small or unusual for a program, and borrowers with a track record their network can see. Hard money shines for speed at scale, predictable terms, and draws managed by a third party. Many experienced investors use both: hard money for the first lien, a private lender for the down payment or rehab gap — with the hard money lender’s consent, since most prohibit undisclosed junior liens.

Frequently asked questions

Can family lend me money for a flip?

Yes, with a note and a recorded lien. Treat it as a real loan with real terms; an undocumented family loan creates tax, estate and relationship problems if the deal goes wrong.

Is private money cheaper?

Often in points and sometimes in rate, but the real advantage is flexibility. A private lender may accept a profit share, a deferred interest structure, or 100% funding — at the cost of giving up more of the upside.

Can a private lender foreclose?

Yes, with the same state procedures as any lender, provided the lien was properly recorded. An unrecorded loan is an unsecured debt.