Private Money Lenders: How to Find, Pitch and Structure Your First Loan

Private money lenders are individuals who lend their own money to real estate investors, usually secured by a mortgage or deed of trust on the property, on terms negotiated directly between the two of you. They are often people you already know, such as colleagues, other investors, business owners or someone with retirement savings in a self-directed IRA, and for many investors they become the cheapest and most flexible money available once there is a track record to show.

Search for this term and you mostly get lender directories. This guide covers what the directories skip: who private lenders actually are, how the loans are documented, the securities, lending and retirement-account rules that apply when you borrow from individuals, and how to make a first pitch without overpromising.

Private money, hard money and bank loans compared

Feature	Private money	Hard money	Bank or conventional
Who lends	An individual, using personal or IRA funds	A lending company or fund	A bank, credit union or mortgage lender
Terms	Fully negotiated	Set by the lender’s program	Standardized underwriting
Main basis for approval	Relationship, deal and track record	Property value and borrower experience	Credit, income and debt ratios
Speed	As fast as the lender’s money is available	Days to a few weeks	Weeks
Cost	Varies widely; often below hard money once trusted	Interest plus points and fees	Lowest rate, slowest process
Fits	Flips, BRRRR purchases, gap funding, repeat deals	Flips and short-term bridge loans	Long-term holds on finished properties

The line between private and hard money is blurry, and some people use the terms interchangeably. The practical difference is that a hard money lender runs a business with a program, while a private lender is making a personal decision about you and your deal. Our hard money loan guide covers the institutional side in detail.

Who private money lenders really are

• Professionals with savings and little time. Doctors, engineers, business owners and retirees who want a return secured by real estate without managing property.
• Self-directed IRA holders. Some custodians allow IRA funds to make loans secured by real estate, subject to the IRS prohibited transaction rules covered below.
• Experienced investors. Landlords and flippers with idle cash between their own projects.
• Your own buyers. Cash buyers on your list sometimes prefer lending on a deal to buying it.
• Friends and family. Often the first lender, and the relationship with the most to lose if the deal goes badly.

Why wholesalers should care about private money

A pure wholesale assignment does not need a loan. But private money shows up around wholesaling in several ways:

• Funding a double close when the title company will not allow an assignment and you need to buy before you resell; see transactional funding and double closing.
• Covering the gap between what a hard money lender will fund and the full cost, which is what gap funding does.
• Moving from wholesaling to flipping or wholetailing, where you buy the house yourself.
• Helping your buyers close. A buyer with a lender relationship you introduced closes more often, and faster.

A private lender who funds you can also provide a proof of funds letter for a specific deal, which strengthens offers with agents and sellers who want evidence you can close.

How to find private money lenders

1. Start with people who already trust you. First private loans often come from someone who knows your work ethic. That is also the group where you have the most to lose, so the documentation and honesty standards below matter even more.
2. Show up where investors gather. Local real estate investor associations, landlord meetups and contractor networks are full of people with capital and an understanding of the risk.
3. Ask professionals who see capital. CPAs, estate planning attorneys and title officers work with people who have money to place. Ask for introductions, not endorsements.
4. Turn closed deals into case studies. A one-page summary of a finished project, with real numbers, is the most persuasive thing you can show a prospective lender.
5. Talk about what you do, not about an offering. Conversations about your business are normal. Public advertising that solicits investors for a return is a different matter, as the next section explains.

Vetting runs both ways. A real private lender can show that the money is available, will close through a title company or attorney, and does not ask you for an upfront “processing” or “commitment” fee before anything is funded. If someone you met online calls themselves a private lender and wants money from you first, walk away. Ask every new lender how they have lent before, who handled the closing, and whether you can speak with another borrower they have funded.

The rules that apply when you borrow from individuals

This is the section most private money content leaves out, and it is where well-meaning beginners get into real trouble.

When a note becomes a security

A promissory note can be a security. In Reves v. Ernst & Young (1990), the U.S. Supreme Court started from the presumption that notes are securities and then recognized categories that are not, using a “family resemblance” test that looks at why the money was raised, how the notes are distributed, what the public expects and whether another regulatory scheme protects investors. States can take a stricter view: the New Hampshire Bureau of Securities Regulation, for example, has said it rejects the family-resemblance test and treats promissory notes as securities.

A single loan from one person, secured by a specific property and negotiated face to face, looks very different from a fund that pools money from many passive investors. If you move toward pooling, you are likely raising securities. The SEC explains on Investor.gov that a Rule 506(b) offering cannot use general solicitation or advertising and allows up to 35 non-accredited but sophisticated purchasers, while Rule 506(c) permits general advertising only if every investor is accredited and the company takes reasonable steps to verify it. That is the point where a securities attorney belongs on your team, before you raise a dollar.

Business-purpose loans vs. consumer loans

Federal Truth in Lending rules exempt credit extended primarily for a business purpose under 12 CFR 1026.3(a). The official commentary says credit to acquire, improve or maintain rental property that is not owner-occupied is deemed business purpose, regardless of the number of units. A private lender lending to an investor on a rental or flip is usually in business-purpose territory. A private lender lending to someone who will live in the home is not, and consumer lending laws and state licensing rules can apply. Usury limits and exemptions also differ by state, so have the closing attorney or title company confirm the rate and fees are permissible where the property sits.

Retirement-account money has extra rules

The IRS lists borrowing money from an IRA, selling property to it and using it as security for a loan among prohibited transactions. Disqualified persons include the IRA owner’s fiduciary and family members: spouse, ancestors, lineal descendants and their spouses. If the owner engages in a prohibited transaction, the account stops being an IRA as of the first day of that year and is treated as distributed. In plain terms, you cannot borrow from your own IRA for your deals, and you cannot borrow from your parents’ or children’s IRAs either. Unrelated people can lend from their self-directed IRAs, and their custodian and tax adviser should confirm the structure.

How a private money loan is documented

A handshake loan is how friendships end. Every private loan secured by real estate should include:

1. A promissory note stating the amount, rate, payment schedule, maturity date, late fees, default terms and any prepayment terms.
2. A recorded mortgage or deed of trust giving the lender a lien on the property, the form depending on the state.
3. A lender’s title insurance policy so the lender knows the lien position and is protected against title defects.
4. Hazard insurance naming the lender as mortgagee or loss payee, plus builder’s risk coverage during a heavy rehab.
5. A closing through a title company or attorney, with funds wired to escrow, not to you personally.
6. A draw schedule if rehab funds are released in stages after work is verified.

This documentation protects you as much as the lender. It sets expectations in writing and proves both sides treated the loan as a business transaction.

Worked example: a first private loan on a flip

Every figure here is hypothetical and is only meant to show the mechanics. You have a house under contract at $145,000. Repairs are estimated at $35,000, and the after-repair value is $270,000. A private lender agrees to fund $150,000 at 10 percent interest-only, with 2 points, for up to 12 months, secured by a first-position deed of trust. You bring the remaining $30,000 plus closing costs.

Item	Amount
Loan amount	$150,000
Loan-to-cost ($150,000 ÷ $180,000)	83%
Loan-to-ARV ($150,000 ÷ $270,000)	56%
Points (2%) paid at closing	$3,000
Monthly interest at 10%	$1,250
Interest over an 8-month project	$10,000
Total cost of the money	$13,000

The lender is looking at the 56 percent loan-to-ARV: even if the resale comes in well below estimate, there is a cushion between the loan and the value. You should be looking at the timeline. If the project runs 12 months instead of 8, interest rises to $15,000, and the deal has to absorb it. Test the full project, including the financing cost and a slower sale, in the fix-and-flip calculator before you sign the note.

The same lender on a rental refinance

Private money also works as the short-term piece of a buy, renovate and refinance plan. Suppose (hypothetically) a lender funds $120,000 to buy and fix a house you plan to keep, at the same 10 percent interest-only. After six months of work and leasing, you refinance into a long-term rental loan and pay the private lender back from the proceeds. Interest is $6,000 plus any points. The risk here is the refinance itself: if the appraisal comes in low, rates move or the lender requires a longer seasoning period, you may not be able to borrow enough to repay the private loan on time. Agree in writing on what happens if the refinance is delayed, such as a defined extension at a stated rate, before you close.

Pitching your first private lender

Lenders want to know three things: what happens to their money, how they get it back, and what happens if something goes wrong. Your one-page deal summary should cover:

• The property, purchase price, repair budget and after-repair value, with comps attached.
• The loan amount, lien position, rate, term and payment schedule.
• The exit plan, whether resale, refinance or sale to a landlord, and a backup exit.
• Your track record, or the experienced partner or contractor on the project.
• Insurance and title protections the lender will receive.

What you should never say: that the loan is “guaranteed,” “risk-free” or “safe as a bank.” Real estate loans can and do go into default, values can fall and projects run long. Describe the risks plainly and explain how the collateral and documents address them. Lenders who hear the risks from you upfront are the ones who lend to you again.

Questions a lender will ask, and good answers

• “What if the house does not sell?” Explain the backup exit, such as selling to a landlord at a lower price or refinancing and renting, and show the numbers for it.
• “What if the rehab runs over budget?” Show your contingency line, typically a percentage of the repair budget, and where extra money would come from.
• “How will I know what is happening?” Offer a simple update schedule with photos at each draw and a short written status every month.
• “What happens if you get hurt or disappear?” Explain who else can manage the project and how the lender’s recorded lien protects them either way.

Keeping a private lender for the long run

The first loan is the hardest to get; the second one usually comes from the same person if the first went well. Investors who build lasting private money relationships tend to do a few simple things consistently. They send updates before the lender has to ask. They report bad news early, with a plan attached. They pay on time every month and return principal promptly at payoff, with the release of the lien recorded through the title company. And they do not ask an existing lender to roll into a new deal until the old one is fully closed out. A lender who has been repaid once, with no surprises, becomes your best source of referrals to other lenders.

When private money is the wrong move

• Before you have done a deal. Learning on someone else’s retirement savings is a hard lesson for both of you. Many investors do a few wholesale assignments first, then borrow once they understand repairs and resale.
• From someone who cannot afford a delay. If a lender needs the money back on a fixed date for living expenses, a stalled project becomes a personal crisis.
• When the deal only works with perfect execution. If one extra month or a 5 percent lower sale price wipes out the profit, the problem is the deal, not the financing.
• When you are pooling money from many people. That is a securities offering, and doing it informally is one of the most serious mistakes in this business.

If you want guidance on structuring your first funded deal with someone who has done it before, our mentorship program walks through lender conversations and deal packages with students one on one.

Private money lender FAQ

What interest rate do private money lenders charge?

There is no standard. Rates and points are negotiated and depend on the lender’s alternatives, your experience, the lien position and the loan-to-value. Many investors benchmark against local hard money terms and offer a private lender a competitive rate with less paperwork. State usury rules set the outer limits.

Do private lenders check credit?

Some do and some do not. Most care more about the property, your plan and your history of doing what you said you would do. Expect to be asked about past projects.

Should a private lender be in first position?

Usually yes. First position means the lender is paid before any other lien if the property is sold or foreclosed. Second-position loans, such as gap funding behind a hard money loan, carry more risk and usually cost more.

How much should I borrow on a first deal?

Less than the most a lender will offer. Keep the loan-to-value low enough that a lower sale price still repays the lender in full, and keep your own money in the deal so both of you share the outcome.

Can I use private money to buy my own home?

That becomes a consumer mortgage, which brings federal and state consumer lending rules into play. It is a different transaction from an investor loan and should be handled by a licensed mortgage professional.

More on funding your deals