Private money is capital from individuals — a relative, a colleague, a retired professional with cash earning little — rather than from a lending business. The terms are whatever the two parties agree, the relationship is personal, and the paperwork is the only thing standing between a good arrangement and a ruined friendship. It is how a large share of small-scale real estate actually gets financed.
Private money against hard money
Hard money comes from a lending business with a published process, standard terms, draw procedures and underwriting staff. Private money comes from an individual who is making a one-off decision. Private money is usually cheaper and more flexible, and slower and less predictable — there is no committee, but there is also no process, and the lender may simply change their mind. Many investors use private money for acquisition and hard money when speed and certainty matter more than rate.
How the deals are typically structured
Two common shapes. A secured note: the private lender makes a loan at an agreed rate, secured by a recorded mortgage or deed of trust on the property, with a defined term and often interest-only payments. Or an equity split: the lender funds the deal in exchange for a share of profit rather than interest. The note is simpler, more defensible and easier to exit. The equity split aligns incentives but creates a partnership, with everything that implies.
What must be documented, without exception
A written promissory note stating amount, rate, term, payment schedule and default remedies. A recorded mortgage or deed of trust — an unrecorded loan is unsecured, leaving the lender a general creditor with no claim on the property. A lender’s title policy. Hazard insurance naming the lender as mortgagee. And a clear written exit. Handshake deals between people who trust each other are exactly the ones that end badly, because nobody wrote down what happens if the project runs long.
What the borrower owes the lender in candour
Most private lenders are not professional investors and do not know what questions to ask. The borrower who volunteers the risks — what happens if the renovation overruns, what the property is actually worth today, what position the lender is in, what the realistic timeline is — keeps the relationship and the funding source. The one who presents only the upside gets one deal and a difficult conversation afterwards.
The takeout
Private money is almost always short-term, so plan the repayment before accepting it. If the property is being kept as a rental, the exit is a refinance into long-term financing — usually a DSCR loan, which qualifies on the property’s rent and will pay off the private note. Check the lender’s seasoning requirements before you set the private note’s term, so the two line up rather than leaving a gap you have to fill under pressure.
Private Money Lending in Real Estate FAQ
It is negotiated, and commonly sits below hard money and above conventional. Many private lenders are comparing against a savings rate, which is the borrower’s leverage.
It does not have to be, but it should be. An unsecured note leaves the lender as a general creditor with no claim on the property.
Yes, and it is common. Document it exactly as you would with a stranger — note, recorded lien, title policy, insurance. The documentation protects the relationship more than it protects the money.
Six to twenty-four months for project financing, sometimes longer for a buy-and-hold arrangement. Match it to your realistic exit, with margin.
For business-purpose loans on investment property, generally not, though requirements vary by state and lending to owner-occupants is treated very differently. Worth checking locally before making a habit of it.
Existing relationships, local investor groups, professionals with idle capital, and self-directed retirement account holders. It is a relationship business rather than a marketplace.