What is private lending in real estate?
Private lending means an individual or private fund, rather than a bank, lends money to a real estate project, usually short-term, secured by a recorded deed of trust or mortgage on the property. The lender earns a stated interest rate for a stated term rather than a share of profit, and the collateral, lien position and loan-to-value ratio are the lender's main protection if the borrower cannot repay.
Banks lend on finished houses to people with W-2s. They do not lend quickly on a fire-damaged house to an investor who wants to close in two weeks. Private lenders (sometimes called hard money or private money lenders) fill that gap, and individual investors can be the source of that capital.
How a private loan is structured
- Purpose: typically the purchase and renovation of a property that will be resold or refinanced.
- Term: short, often 6 to 18 months, with defined extension terms.
- Rate and points: an interest rate above bank rates, sometimes with origination points, reflecting speed, risk and the condition of the collateral.
- Security: a promissory note plus a deed of trust or mortgage recorded against the property. Lenders generally want first position.
- Loan-to-value: the amount lent as a percentage of the property’s value, whether as-is or after repair. A conservative cap (many private lenders use 65 to 70% of after-repair value) leaves room for things to go wrong. See What does loan-to-value mean?
- Draws: rehab funds released in stages as work is inspected, rather than up front.
Debt vs. equity, from the lender’s seat
A lender gives up the upside. If the project is a home run, the lender still earns the stated rate. In exchange, the lender is paid before every equity holder and has the right to foreclose if the borrower defaults. Many people who start in private real estate start here because the downside is easier to reason about: it is the collateral.
What can still go wrong
Foreclosure takes time and money and may leave you owning a half-finished house. Values can fall below the loan amount. Title or insurance gaps can impair your lien. A borrower can stop paying and stop communicating. The risk page applies here too.
Two ways to participate
Directly, by funding a specific loan in your own name (or your IRA’s), or through a private fund that pools lenders’ capital across many loans. Direct lending gives you the lien; a fund gives you diversification and a manager. Both are private securities with the eligibility and document questions covered elsewhere on this site.