Consider the plight of a particular, hopeful real estate investor.  This investor has just found the ideal investment property and plans to hold it for thirty year renting it out, and cashing in on appreciation rates.  In order to achieve this potentially successful investment avenue, however, the investor needs a lender.  Thus the tale of many a hopeful investor.

At this point, many investors choose conventional loans to meet their financing needs, while others choose to work with hard money lenders.  Still others aren’t sure which option is best for their investing needs.  It can just be downright confusing when attempting to educate yourself on the intricacies of financing options.  So, here are the accepted definitions for both loans mentioned in this article.  Hard money loans are funds dispersed by a private source, usually an individual or individuals who have surplus money to invest.  A conventional loan, however, is secured through either a mortgage banker or mortgage broker—financial professionals who either originate loans or sell them to larger lenders up the lending ladder. 

But which one is better for our hopeful real estate investor?  Well, that depends on our investor’s situation; both loans have unique qualities that can be looked at as either strengths or weaknesses.  Hard money can typically be dispersed quicker than conventional loans, but it typically has stricter terms attached and a higher market interest rate, varying anywhere from 12-18%.  Hard money loans can also be a worthwhile avenue for those with less-than-impressive credit scores.  Private lenders typically care more about property value than credit scores.  This is because, with the right interest rate and property value, the lender will be covered in the case that their borrower defaults on the loan.

On the other hand, many investors still choose conventional loans.  These are still preferred by many because of their typically lower interest rates and more flexible repayment schedule.  This type of lender also has the power to offer long-term loans whereas most hard money loans are dispersed for a period of 6 months to 5 years.  This works fine for short-term investors flipping or wholesaling.  However, if a real estate investor wishes to pursue a long-term hold, like our hypothetical investor, this loan period is not nearly long enough.

Now, let’s analyze our long-term investor’s dilemma at the beginning of this article.  The wiser choice for them depends on their financial situation and the situation of their investment.  Does the investor have great credit or not-so-perfect credit?  If they have strong credit scores then a conventional loan is probably best for them, because the chances of finding a private lender for a long-term hold are slim.  Of course, our investor could always refinance down the road and start out with hard money.

As you can see, there are several options and factors to consider; a wise investor researches plenty and chooses according to their unique situation.