Private Money Lending: How It Works for Real Estate Investors
Private money lending is when an individual (not a bank or institutional lender) lends money for a real estate transaction, secured by the property itself. For investors, private money fills the gap between conventional bank financing (slow, strict qualification) and hard money loans (fast but expensive). Private lenders are typically people you know — or people you build relationships with — who want to earn a better return on their capital than savings accounts or stocks provide.
This guide covers how private money lending works, how to find lenders, how to structure deals, typical terms, legal requirements, and how private money fits into different investment strategies including wholesaling, fix-and-flip, and BRRRR.
Private money vs. hard money vs. conventional loans
Understanding the differences helps you choose the right financing for each deal:
| Factor | Private Money | Hard Money | Conventional |
|---|---|---|---|
| Source | Individuals | Lending companies | Banks / credit unions |
| Interest rate | 8-12% | 10-15% | 6-8% |
| Points (origination) | 0-2 | 2-5 | 0-1 |
| Approval speed | Days | Days to 1 week | 30-45 days |
| Credit requirements | Negotiable | Minimal | Strict (680+) |
| Term length | 6-24 months | 6-18 months | 15-30 years |
| LTV typical | 65-75% ARV | 65-75% ARV | 80-97% purchase price |
| Flexibility | Highly negotiable | Standardized | Standardized |
The key advantage of private money is flexibility. Terms are whatever you and the lender agree to. There is no underwriting department, no appraisal requirement (unless the lender wants one), and no 45-day closing timeline.
How private money lending works
The basic structure:
- You find a deal that needs financing — a flip, rental acquisition, or BRRRR property.
- You present the deal to a private lender. Show them the numbers: purchase price, ARV, repair estimate, projected profit or cash flow.
- You agree on terms. Interest rate, loan amount, term length, payment schedule, and how the loan is secured.
- The lender funds the purchase (and often the rehab) through a title company.
- You execute your strategy — renovate and sell, renovate and rent, or hold.
- You repay the lender when you sell or refinance the property.
The lender's security is a lien on the property (typically in first position), recorded at the county. If you default, the lender can foreclose and take the property. This is why lenders care about loan-to-value ratio — they want enough equity cushion that even in a worst case, the property is worth more than the loan.
Finding private lenders
The best private lenders are closer than you think. Start with people who already know and trust you:
Your existing network
- Family and friends. People who know your work ethic and character. Start with small deals to build a track record.
- Business associates. Professionals with savings earning low returns who would welcome 8-12% secured by real property.
- Self-directed IRA holders. Individuals with retirement accounts that allow real estate lending. This is a massive underutilized pool of capital.
REI networking
- Local REI meetups. Attend consistently. When you have a deal, the room already knows you.
- Real estate attorney referrals. Attorneys who handle real estate transactions know clients with capital looking for returns.
- Title company connections. Title companies see who is funding deals and can make introductions.
Building credibility
Private lenders need confidence that you will execute and repay. Build credibility with:
- A professional deal package showing your analysis — purchase price, ARV with comparable sales, detailed repair budget, timeline, and projected profit.
- Your track record — deals completed, returns delivered, references.
- Clear communication and transparency about risks.
The pitch is simple: "I have a property under contract for $120,000. After $30,000 in repairs, it will be worth $200,000. I need $150,000 for 6 months. I will pay you 10% annualized interest, secured by a first-position lien on the property. Your loan is at 75% of the after-repair value, giving you a 25% equity cushion."
Structuring private money deals
Interest-only with balloon
The most common structure for fix-and-flip. You pay interest monthly and repay the principal in a lump sum (balloon) when you sell or refinance. Example: $150,000 loan at 10% = $1,250/month in interest. Principal repaid at sale.
Deferred interest (accrued)
No monthly payments. Interest accrues and is paid along with principal at sale or refinance. Preferred by flippers who want zero carrying costs during the rehab period. Example: $150,000 at 10% for 6 months = $7,500 in accrued interest, $157,500 total repayment.
Equity participation
Instead of (or in addition to) interest, the lender receives a percentage of the profit. Example: Lender funds the deal at 0% interest but receives 25% of the net profit. Works when the deal has high projected returns and the lender wants upside participation.
Hybrid structures
Combine interest + profit split. Example: 6% interest plus 10% of profit. This lowers the borrower's carrying costs while giving the lender both safety (interest) and upside (profit share).
Typical private money terms in 2026
| Term | Typical Range | Notes |
|---|---|---|
| Interest rate | 8-12% | Lower for experienced borrowers with track records |
| Points (origination fee) | 0-2 points | Many private lenders charge zero points |
| Loan-to-value (LTV) | 65-75% of ARV | Some lenders go higher with strong borrower history |
| Term | 6-18 months | 12 months is most common for flips |
| Down payment | 10-25% | Some lenders fund 100% of purchase + rehab |
| Prepayment penalty | None (usually) | Negotiate this — you want flexibility to repay early |
Legal requirements and documentation
Private money lending is legal in all 50 states but requires proper documentation to protect both parties:
- Promissory note. The legal document specifying loan amount, interest rate, payment schedule, maturity date, and default remedies.
- Deed of trust or mortgage. Secures the loan against the property. Recorded at the county recorder's office. Gives the lender the right to foreclose on default.
- Title insurance. Protects the lender's lien position. The lender should require a lender's title policy.
- Property insurance. Required naming the lender as mortgagee/loss payee.
Use a real estate attorney to draft or review all documents. Do not use generic templates from the internet for loans over $50,000. The cost of proper legal documentation ($500-$1,500) is trivial compared to the risk of an unenforceable note.
Private money for different strategies
Fix and flip
The classic use case. Private money funds the purchase and rehab. You renovate and sell, repaying the lender from sale proceeds. Holding costs (interest payments, insurance, taxes, utilities) come out of your profit, so fast execution matters. For estimating flip returns, see our house flipping calculator guide.
BRRRR strategy
Private money funds the initial purchase and rehab. After renovation and tenant placement, you refinance into a conventional loan (lower rate, longer term) and repay the private lender. The BRRRR method works best when the ARV is high enough that the refinance covers the full private money payoff.
Rental acquisitions
Some landlords use private money to close quickly on a rental property, then refinance into conventional financing within 6-12 months. This lets you compete with cash buyers on speed while eventually getting institutional rates. See our rental property ROI guide for analyzing these deals.
Wholesaling
Wholesalers rarely need private money (since you are assigning the contract, not buying the property). However, if you plan to double close instead of assign, you need funding for 24-72 hours — sometimes called transactional funding. Some private lenders offer this at premium rates.
Risks and how to mitigate them
For borrowers
- Overestimating ARV. If the property sells for less than projected, your profit shrinks or disappears. Use conservative comps and get multiple opinions.
- Rehab budget overruns. Build a 10-15% contingency into every budget. Unexpected foundation issues, permit delays, or material price increases can blow your timeline and budget.
- Market downturn. If you cannot sell or refinance, you still owe the lender. Negotiate extension clauses in your loan documents upfront.
For lenders
- Borrower default. The property secures the loan, but foreclosure is slow and expensive. Stick to 65-75% LTV so the property value covers the loan even in a down market.
- Bad renovation. Inspect or have an independent inspector verify work before releasing rehab draws.
- Second position risk. Always verify you have a first-position lien. Second-position lenders get paid after the first-position lender in foreclosure.
Private money vs. hard money: when to use each
For a detailed breakdown, see our hard money vs. private money comparison.
Use private money when: You have a relationship with a lender, you want lower rates, you need flexible terms, or the deal does not fit hard money criteria (unusual property type, rural area, complex structure).
Use hard money when: You need guaranteed fast funding (private lenders can back out), you do not have private lending relationships yet, or you need a larger loan amount than any single private lender can provide.
Frequently asked questions
How do I ask someone to be a private lender?
Lead with the investment opportunity, not the ask. "I have a property deal that returns 10% annualized, secured by the property. Would you be interested in seeing the numbers?" Frame it as an opportunity for them, not a favor for you.
What interest rate should I offer?
8-12% is the standard range in 2026. Offer enough to be attractive compared to their alternatives (savings at 4-5%, stocks averaging 8-10% with risk and volatility) while keeping your deal profitable.
Do I need a license to borrow private money?
No. As a borrower, you do not need a lending license. However, if you plan to broker loans (connect borrowers with lenders for a fee), you may need a mortgage broker license depending on your state.
Can I use private money for my first deal?
Yes, but it is harder without a track record. Start with a small deal, offer slightly higher returns to compensate for the lender's higher risk, and provide detailed documentation showing your analysis and plan.