What Is Private Money Lending?
Private money lending fills the space between conventional bank loans and institutional hard money. The lender is typically someone you know or meet through your network: a retired professional, a self-directed IRA holder, a family member, or a local businessperson looking for better returns than their brokerage account delivers. Interest rates generally run 8-12%, terms last 1-3 years, and the loan is secured by the property through a recorded mortgage or deed of trust. Unlike hard money lenders who operate as businesses with standardized products, private lenders negotiate every term individually. There are no application fees, no committee approvals, and no bureaucratic underwriting. A deal can close in 7-10 days when both parties agree. The borrower gets flexible financing, and the lender earns passive income backed by real property — a straightforward exchange that has funded real estate deals for centuries.
Private money lending is a loan from an individual person — not a bank or institutional lender — secured by real estate, with terms negotiated directly between borrower and lender.
At a Glance
- Interest Rates: Typically 8-12% annually, negotiated between borrower and lender
- Loan Terms: 1-3 years, often interest-only with a balloon payment at maturity
- Collateral: First or second position lien on the property via recorded mortgage or deed of trust
- Closing Speed: 7-14 days with a willing lender and clear title
- Documentation: Promissory note, mortgage/deed of trust, and often a personal guarantee
- Regulation: Subject to state usury laws and securities regulations; consult an attorney for compliance
How It Works
A private money loan starts with a relationship. The borrower identifies an investment opportunity — say, a distressed duplex in Nashville for $185,000 that needs $40,000 in rehab and will sell for $310,000 — and presents the deal to a private lender. The pitch includes purchase price, repair budget, after-repair value, timeline, and exit strategy. If the lender agrees, both parties negotiate the rate, term, points, and collateral position.
The loan is documented through a promissory note (the borrower's promise to repay) and a mortgage or deed of trust (the lien against the property). A real estate attorney or title company prepares and records the documents. The lender's lien position — first or second — determines their priority in case of default. First position lenders get paid before anyone else if the property is sold or foreclosed.
Most private loans are structured as interest-only with monthly payments. On a $200,000 loan at 10%, the borrower pays $1,667 per month in interest. Principal is returned as a lump sum when the borrower refinances into permanent financing or sells the property. Some lenders prefer to accrue interest and receive everything at payoff, simplifying the arrangement.
Points — upfront fees charged as a percentage of the loan — are common. One to three points at closing is standard. On a $200,000 loan, two points means $4,000 paid at closing. Points compensate the lender for the risk and administrative effort of making the loan.
The borrower's exit strategy matters more than their credit score. A private lender wants to know: how does the money come back? Flippers exit by selling the renovated property. BRRRR investors exit by refinancing into a conventional or DSCR loan once the property is stabilized. Either way, the lender needs a clear, realistic path to repayment within the agreed term.
Real-World Example
David Park, a buy-and-hold investor in Charlotte, North Carolina, found a fourplex listed at $340,000 in the NoDa neighborhood. The property needed $55,000 in renovations — new HVAC units, updated kitchens, and roof repair. Conventional lenders wouldn't touch it because two units were vacant and the property didn't meet minimum condition standards.
David approached his former employer, a retired orthodontist named Bill, who had $2.1 million in a self-directed IRA and was earning 4.2% in bonds. David presented the deal: a $395,000 first-position loan at 9% interest-only, 18-month term, with two points at closing. Bill's IRA would fund the purchase and rehab, secured by a first mortgage on the property.
Bill's attorney reviewed the documents. The title company handled closing and recorded the deed of trust. David drew rehab funds from an escrow account as work was completed, verified by a third-party inspector.
Fourteen months later, David had all four units rented at $1,100 each ($4,400/month gross). He refinanced into a DSCR loan at 7.5% for $380,000, based on a new appraisal of $510,000. Bill's IRA received the $395,000 principal plus $29,625 in interest payments and $7,900 in points — a 9.5% annualized return secured by real property. David kept a fourplex worth $510,000 with $130,000 in equity and $4,400 in monthly rent against a $2,714 mortgage payment.
Pros & Cons
- Close in 7-14 days without bank underwriting delays or committee approvals
- Terms are fully negotiable — rate, duration, draw schedules, and repayment structure
- No income verification, tax returns, or W-2 requirements in most arrangements
- Fund deals that banks reject: distressed properties, rapid closings, or borrowers with recent credit events
- Build long-term lending relationships that provide repeat capital for future deals
- Interest rates of 8-12% significantly increase carrying costs compared to conventional 6-7% loans
- Shorter terms (1-3 years) create refinance risk if the exit strategy doesn't execute on schedule
- Personal relationships can strain if the deal goes sideways or payments are late
- Limited capital pool — most individual lenders can fund one or two deals at a time
- Regulatory risk if loan terms violate state usury laws or securities regulations
Watch Out
- Securities Law Compliance: Offering returns to multiple individual lenders can constitute selling an unregistered security under federal and state law. If you solicit funds broadly, consult a securities attorney. Regulation D exemptions may apply, but ignorance is not a defense.
- Usury Limits: Many states cap the maximum interest rate on private loans. Texas allows up to 18% for commercial loans; New York caps at 16% with criminal usury above 25%. Know your state's limits before negotiating terms.
- Documentation Gaps: Handshake deals without recorded liens invite disaster. Every private loan needs a promissory note, recorded mortgage or deed of trust, and title insurance. Skipping documentation exposes both parties to loss.
- IRA Compliance: Self-directed IRA lenders face strict prohibited transaction rules. The borrower cannot be a disqualified person (spouse, parent, child, or their spouses). Violations can disqualify the entire IRA, triggering taxes and penalties on the full account balance.
Ask an Investor
The Takeaway
Private money lending is the most flexible capital source available to real estate investors. The speed, negotiability, and accessibility make it ideal for deals that don't fit institutional lending boxes — distressed properties, tight timelines, or unconventional borrower profiles. The tradeoff is cost: 8-12% interest plus points cuts into margins, so the deal needs to support those carrying costs. Investors who build a reliable network of private lenders gain a competitive edge — they can move fast, close with certainty, and scale their portfolio beyond the limits of conventional financing.