Private Money Lender vs Private Money Partner

Intro

For those who prefer video format, I've linked a less detailed video I made on this topic recently. This is different than the previous article I wrote about the differneces between Private Lenders and Hard Money Lenders, which also can be confusing.

25-year-old Blake Selby associated private lending and private lenders with more expensive non-bank money that offered a similar yet slightly worse product. I assumed that hard money lenders and hard money lending was a subset of that worse product with the only difference being that it was less borrower focused and more asset based.

Loans: Not all loans created equal, but all are debt

In some ways I was correct, but I was missing a whole world I had yet to uncover. My first wrong assumption was that private lenders, hard money lenders, and banks are offering a similar product. There are so many loan product types that it would be outside the scope of this article to cover them here, but some that stand out are transactional funding, construction loans, 2nd position+ lending, "Gator" lending, DSCR loans, Bridge loans, Gap loans, Unsecured loans, warehouse lines of credit. There are so many more. I may end up writing a blog post detailing these but for now the point is to understand how many unique loan products there are. One thing these products all have in common is that they are debt or debt instruments. Most are secured by the collateral, which tends to be real property. There is an amount "owed", there is a borrower, and more importantly, there is an expectation of repayment and in many cases a subsequent litigation in the event of nonperformance. These are products of a PML ( private lender ) , HML ( hard money lender) or a Bank. Some loans are non-recourse (meaning they can't come after your other assets if the loan gets foreclosed on, auctioned, and the lender is owed more money than is yielded by liquidating the property.

Equity Investments: No foreclosure fees or record, asset protection, no debt

On the flip side you've got an entirely different type of investor who isn't interested in seeking repayment from a borrower, and doesn't want debt. This is someone who is willing to take a bet on the deal itself. In this case, there is no borrower, and you might call the party seeking the investment a minority partner, an interested party, or the contractor. "Contractor" generally works well for flips because there is work being performed and in consideration for said work being completed, the investor (not lender) might draw up a contract granting the contractor the right to any net proceeds from the future sale of the property above a certain amount which the investor must first receive. This works well as the investor is generally bringing more money to the deal than the contractor, and therefore has more total dollars at risk. This arrangement generally gives the investor more control, as they are typically the deeded owner of the property. The investor may elect to give the contractor special controls within a given time period to make the contractor feel safer and to smooth the renovation or building process. I'm speaking very generally here, because I've seen an array of unique terms and arrangements between investors and contractors. Above I spoke about some loans being non-recourse. The great thing about equity investments by private money partners is that they are 100% non-recourse. Another consideration is that in the event of a default on a loan, the fees associated with a foreclosure are monstrous (can easily get into the 10's of thousands) and are typically paid by the sale proceeds that the borrower would have been otherwise entitled to. Equity investments by private money partners don't have this risk because the investor is already the deed holder, avoiding the need for foreclosure altogether. If a borrower fails and the loan gets foreclosed, the borrower's record will be tarnished and it may be hard to get loans in the future. Equity investments don't have that risk. Asset protection is a lesser talked about benefit of equity investments but it can be very helpful, especially against potential divorce claims or super liens and judgements against a borrower (in the above loan scenario) prior to purchase or prior to an exit. Generally the private money partner is going to have a much lower risk of this given their robust financial position and having the deed in their name may just save you from being hit by creditors plus any potential liability insurance claims on the subject property. With a private money partner, your downside is literally limited to the money you put into the deal.

Conclusion

In conclusion, there are benefits to using private lenders, hard money lenders, and banks, but in many situations it makes sense to utilize private money partners. I wish 25-year-old Blake Selby knew back then what I know now, but then I suppose I would have just bought Bitcoin and Tesla in 2015 and missed out on this epic journey that has been real estate investing.