How to Be a Private Money Lender: A Real Investor's Guide to Doing It Right
Every time the market heats up and real estate investors start making money, something predictable happens: people with cash start thinking about becoming lenders. And why not? You earn strong returns, your money is secured by real property, and you don't have to swing a hammer or deal with contractors. On paper, it sounds almost too good.
The problem is that most new private lenders walk into this business the same way bad investors walk into their first deal — with enthusiasm and without a system. They lend on a handshake, trust pictures over inspections, skip the attorney, and find out the hard way that "secured by real estate" only protects you if you structured the deal correctly in the first place.
I've been on both sides of this table. I've borrowed private money, and I've lent it. What follows is everything I wish someone had told me — and everything I've learned the hard way — about how to run a private lending operation like a business, not a hobby.
Treat It Like a Business From Day One
The first and most important thing I can tell you is this: private lending is a business. It requires written policies, consistent standards, and the discipline to enforce them even when a borrower makes a compelling case for an exception.
The moment you start bending your own rules because someone seems trustworthy, or because you don't want to lose the deal, you've stopped being a lender and started being a gambler. The investors who lose money in private lending almost always lose it the same way — they abandoned their standards for a deal that "felt" right.
Before you lend your first dollar, write down your lending criteria. What will you lend on? What won't you touch? What are your minimum requirements? Having these in writing isn't just good business — it also makes it easier to say no without it feeling personal.
The Standards You Need to Set Before You Lend
Maximum Loan Amount per Borrower
You need to limit your exposure to any single borrower. If one person or company represents 80% of your lending portfolio and something goes wrong, it can be catastrophic. Decide in advance what the maximum dollar amount you'll have out to any one borrower is — and stick to it, no matter how good the relationship gets.
First Mortgages Only
You can do second mortgages, but understand what you're taking on. In a second position, if the borrower defaults, the first lender gets paid before you see a dime. You may have to bring the first current just to protect your position — and then foreclose on top of that. I don't do second mortgages anymore. The additional yield is not worth the additional risk and complexity. First position only.
Maximum LTV (Loan-to-Value)
This is your primary protection. If your borrower defaults, the difference between what you lent and what the property is worth is the margin that keeps you whole. I recommend a maximum of 70% LTV — meaning if a property is worth $100,000, the most you should lend against it is $70,000.
That 30% cushion accounts for selling costs, holding costs, market fluctuations, and anything else that might erode value between now and the day you have to recover your money. Don't squeeze this number. Seventy percent is not conservative — it's responsible.
A critical point: you should only lend on a property you would be willing to buy yourself. Because for all practical purposes, that's exactly what you might end up doing. If the deal doesn't make sense as a purchase at that price, it doesn't make sense as a loan.
Document Preparation
Have your documents prepared by a real estate attorney. Yes, the borrower typically pays this cost — but make sure the attorney is yours, not theirs. Your docs need to protect you. A promissory note and mortgage (or deed of trust, depending on your state) that are properly prepared by a competent attorney are the foundation of every loan.
If you lend out of state, be aware that documentation requirements vary. Different states have different foreclosure processes, different required language, and different timelines. This is one of the reasons I strongly recommend staying close to home — you know the market, you can inspect properties yourself, and your legal framework is familiar territory.
Establishing Property Value
Appraisals are fine when a bank is lending other people's money. When it's your money, you need to do your own due diligence. An appraisal is one person's opinion on one day. It's not infallible, and appraisers can be wrong — especially on distressed properties, which have unique valuation challenges.
Drive the neighborhood. Pull comps yourself. Know what houses are actually selling for, not just what an appraisal says they should sell for. Use a licensed appraiser as one data point if you choose, but never as your only data point.
Purchase Money Only vs. Purchase and Rehab
Lending on purchase only — where the borrower funds their own renovation — is the simplest and often safest structure, provided the borrower genuinely has their own capital to complete the work. But here's the catch: if the investor runs out of money mid-rehab and can't finish the project, you now hold a lien on a partially completed property that's worth less than what you lent.
Sometimes lending the full amount — purchase plus rehab — in a controlled draw structure is actually the safer approach. At least then you know exactly where the money is and you control the release of funds. Which brings me to the next point.
Construction Draws and Inspections
Never release renovation funds in advance. Never. Release draws only after the work has been inspected and confirmed complete. I do my own inspections. I don't trust pictures.
I learned this firsthand. I had an investor send me photos of a house being sided. The photos looked great. What I didn't know — until much later — was that he'd only photographed two sides of the house. The other two sides were never sided. The contractor was paid for all four. Always inspect in person.
If a borrower is asking you to release funds before work is done, that's a serious red flag. A cash-strapped investor who needs draw money early may be planning to spend it on a different project entirely — one you have no interest in and no lien on. Your draw funds exist to improve the collateral securing your loan. That's it.
Payment Collection vs. Deferred Interest
Many borrowers will ask you to defer interest until payoff — no monthly payments, everything settled at the end when the house sells. This sounds convenient. What it actually means is that every month that passes, your risk grows. You are now fully exposed with no cash flow coming back to you, and if something goes wrong, you have more to lose.
I no longer defer interest. Collect payments along the way. Monthly payments also serve as an early warning system — a borrower who stops paying is often a borrower who is in trouble, and the sooner you know that, the better positioned you are to respond.
Evaluating the Borrower
The property is your primary collateral, but the borrower matters too. Here's what I look at:
Experience: What's their track record? How many deals have they completed? What happened when a deal went sideways? A borrower with five successful flips is a very different risk than someone doing their first deal.
Finances: Do they have their own money in the deal? A borrower with skin in the game is motivated to perform. A borrower who is entirely dependent on your capital has nothing to lose if things go wrong — you do.
Credit: I look at credit not as a hard cutoff but as a character indicator. A history of honoring financial commitments means something.
Capacity: How much is this borrower currently managing? Someone juggling six projects simultaneously may not have the bandwidth to give yours the attention it needs.
And here is the rule I never break: do not simply trust the information the investor gives you. Verify it independently. Pull your own comps. Inspect the property yourself. Confirm the numbers with your own research. The investor has every incentive to present the deal favorably. You have every incentive to see it clearly.
What You Should Expect to Earn — And Why
Let's talk about returns, because this is where a lot of new lenders get talked into bad deals.
A typical private money loan in real estate is priced at 12% interest and 3 points. Points are a percentage of the loan amount paid upfront as an origination fee — so on a $100,000 loan, 3 points means $3,000 at closing, plus 12% per year on the outstanding balance.
New lenders often feel embarrassed to charge this. Borrowers will push back and ask for 6%, 8%, maybe a point or two. They'll tell you that's what they've gotten before, or that the deal doesn't work at your rate. Here's how I think about it:
If the deal only works at 6% and falls apart at 12%, the investor is asking you to subsidize a thin deal with below-market capital. That's not your job. A bank won't give them 6% either — and a bank has institutional resources and portfolio diversification you don't have. Your rate is your rate.
The 12% and 3 points structure exists because private lending carries real risk. You are lending your own capital, on a single asset, in a business where things go wrong. The return reflects that reality. Don't apologize for it.
Beyond the rate, make sure your loan documents include late fees, default provisions, and a clear process for what happens if the borrower doesn't perform. These aren't adversarial terms — they're professional ones. Any legitimate borrower will respect a lender who runs their operation with structure.
A Few Final Thoughts
Private lending done well is one of the best investments available to someone with capital. Done poorly, it's an expensive education. The difference between the two almost always comes down to one thing: discipline.
Discipline to enforce your standards even when the deal looks good. Discipline to inspect even when you trust the borrower. Discipline to say no when something doesn't meet your criteria, regardless of the pressure you feel.
Run it like a business. Document everything. Verify everything. And only lend on deals you'd be comfortable owning — because one day, you might.
A personal note: As many of you know, I have strong feelings about debt, borrowing, and lending — feelings that come from my Biblical perspective. Having said that, if I'm going to be something, I'd rather be on the side of blessing. The Lord says we are blessed to be a lender. Look it up for yourself.
Private money lending done right is one of the most powerful tools in a real estate investor's arsenal — whether you're the one providing the capital or the one borrowing it. Understanding how to structure private loans, evaluate borrowers, and protect your investment is essential knowledge for anyone serious about building long-term wealth through real estate.
Frequently Asked Questions About Private Money Lending
What is a private money lender in real estate?
A private money lender is an individual who lends their own capital to real estate investors, secured by a mortgage or deed of trust on the property. Unlike banks, private lenders can move quickly, set their own terms, and work directly with investors — making them a critical source of funding for fix-and-flip projects and other time-sensitive acquisitions.
What interest rate should a private money lender charge?
The standard rate in private real estate lending is 12% interest plus 3 points (origination fee). Borrowers will often push for lower rates, but those rates don't reflect the real risk of lending your own capital on a single asset. A bank won't lend to most real estate investors at 6-8% — and a bank has institutional resources you don't. Price your risk accordingly.
What LTV should a private lender use?
A maximum of 70% loan-to-value is the standard protective threshold. That 30% cushion between your loan amount and the property's value absorbs selling costs, holding costs, market fluctuation, and any surprises that arise if you ever need to recover your capital through a sale or foreclosure.
Should a private lender do first or second mortgages?
First mortgages only, as a general rule. In a second position, if the borrower defaults you must bring the first mortgage current before you can protect your interest — and then foreclose on top of that. The additional complexity and risk of second position lending is rarely worth the marginal additional yield.
How do private lenders release construction draw funds?
Draws should only be released after work is physically inspected and confirmed complete — never in advance. Releasing funds before work is done creates real risk that the money gets spent elsewhere. Do your own inspections. Don't rely on photos, which can be selectively framed to hide incomplete work.
Want to Go Deeper on This?
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