Private Money Lending for RE Investors
Private money lending is when individual investors lend their personal capital to real estate investors, secured by the property. Unlike hard money (which comes from companies), private money comes from people in your network: friends, family, colleagues, and other investors. The terms are negotiated directly between you and the lender, making it more flexible and often cheaper than hard money.
How private lending differs from hard money
| Factor | Private Money | Hard Money |
|---|---|---|
| Source | Individuals | Lending companies |
| Interest rate | 8-12% | 10-14% |
| Points | 0-2 | 1-3 |
| Terms | Fully negotiable | Standardized |
| Relationship | Personal, ongoing | Transactional |
| Speed | Fast (days) | Fast (1-2 weeks) |
| Flexibility | Very high | Moderate |
Finding private lenders
Private lenders are people with capital seeking better returns than savings accounts (0.5%), CDs (4-5%), or bonds (4-6%). Real estate lending at 8-12% secured by property is attractive to many investors. Look for private lenders among:
- Self-directed IRA holders: People with retirement accounts that can invest in real estate notes
- Retired professionals: Doctors, lawyers, engineers with savings seeking passive income
- Other real estate investors: Investors with capital but no time for active deals
- Business owners: Entrepreneurs with liquid capital from business profits
- Family and friends: People who trust you and want better returns
Structuring the deal
A private money deal needs three things: a promissory note (the loan agreement), a deed of trust or mortgage (the security instrument), and hazard insurance naming the lender as loss payee. An attorney should prepare these documents ($500-$1,000).
Common structures:
- First position lien: Lender has first claim on the property. Most common and safest for the lender.
- Interest-only payments: You pay interest monthly, principal at maturity (property sale or refinance).
- Profit split: Instead of (or in addition to) interest, the lender receives a percentage of profit. This aligns incentives.
Building long-term private lending relationships
The best private lending relationships last decades. Keys to maintaining them:
- Always pay on time. Never miss a payment.
- Provide monthly project updates with photos
- Be transparent about challenges and timelines
- Return capital promptly when the deal closes
- Show them the numbers before and after every deal
A satisfied private lender becomes a repeat lender. One good lender can fund your entire flipping business.
Related articles
- Hard Money Loans Guide
- How to Finance an Investment Property
- How to Flip Houses
- Self-Directed IRA for Real Estate
- Real Estate Partnership Guide