Private Money Lending: How It Works, What It Costs & How To Become A Lender

Written by

Alex Martinez — Founder & CEO, Real Estate Skills. Has wholesaled and flipped houses for over a decade, personally acquiring 33+ residential investment properties, and has funded his own flips with both hard money and private money lenders since 2015.

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Reviewed by

Ryan Zomorodi — Co-Founder & COO, Real Estate Skills. Reviewed and verified the lending terms, deal breakdowns, and legal guidance in this guide before publication.

✓ Updated August 2026 ✓ Fact-Checked 📊 2026 Lending Rates Inside Watch on YouTube

Publication history: Originally published July 26, 2022. Updated July 2025 with expanded sections on private money lending terms, becoming a lender, and legal considerations. Updated August 2026 with 2026 lending rates, a lien-position pricing framework, real deal breakdowns from Alex Martinez and Real Estate Skills students, and corrected guidance on securities and state licensing rules. Reviewed and verified by Ryan Zomorodi, Co-Founder & COO of Real Estate Skills.

That last part is the piece almost nobody explains, and it's the thing that determines what your capital actually costs.

Here's the situation most investors are actually in when they go looking for private money. You found a deal. A hard money lender will cover about 80% of it. You don't have the other 20% — plus the rehab, plus six months of holding costs — sitting in your bank account. That gap is what private money fills, and it's why most investors end up with two lenders on the same deal rather than one.

I've been on both ends of this. My first flip in Poway needed $312,000 from a hard money lender and another $126,000 I didn't have. I got it from three people: one I met at a real estate investors association meeting, one I knew from college, one who was a friend of a friend. Not one of them was in the lending business. They had money sitting in savings accounts earning close to nothing, and I gave them somewhere better to put it.

That's the part beginners get backwards. You're not asking anyone for a favor. A private money lender isn't lending out of the kindness of their heart — they want a return, and you're the one bringing them a way to earn it that beats their savings account.

This guide covers both sides. How private money works and what it costs if you're borrowing it. How to lend it and what you'd actually earn if you're the one with capital sitting idle. And the honest math on both, including a real deal where the spread looked like $149,000 and the investor took home $35,000.

My First House Flip: The Full Capital Stack

Alex Martinez walks through his first fix-and-flip in Poway, California — including the hard money loan that covered 80% of the purchase and the $126,000 he raised from three private money lenders to cover everything else.

 

What Is Private Money Lending?

A private money lender is a person, not a company. A friend, a former colleague, someone with capital sitting in a savings account or a retirement fund who would rather have it earning a return secured by real estate. They aren't in the lending business, they don't have a website, and they aren't looking for you.

That's the first thing to understand, because it shapes everything else. A hard money lender is a corporation whose entire business is lending to investors. They run ads. They're on Google and social media. They are actively trying to find fix-and-flippers who need capital. A private money lender does none of that — which means the finding is your job.

What they have in common is what they're lending against. Neither one is primarily underwriting you. They're underwriting the property and the plan.

Two terms you'll see throughout this guide, defined once here:

• Points — an upfront fee paid at closing, expressed as a percentage of the loan. One point equals 1% of the loan amount. Two points on a $100,000 loan is $2,000, due the day it funds.
• Interest-only — you pay just the interest each month and repay the entire principal in one lump sum when the property sells or refinances. This keeps monthly payments low during the project, which matters when you're carrying a property that isn't producing income.

Private money is short-term, project-based capital. It funds house flips, BRRRR deals, and bridge situations where an investor needs to close before another sale or refinance completes. It is not a mortgage, and it isn't priced like one.

How Most Deals Get Funded: Two Lenders, Not One

The math is what forces it.

A hard money lender will fund most of your purchase. They will not fund your down payment, your rehab, your permits, your insurance, your utilities, or six months of loan payments. Add those up on a modest deal and you're looking for tens of thousands of dollars that has to come from somewhere.

For most investors, that somewhere is a private lender. Not because it's clever financing. Because there's a gap and it has to be filled.

What This Looks Like On A Real Deal

My first flip was a three-bedroom in Poway, California. Listed at $500,000, I got it under contract at $390,000 after the first buyer fell through.

My hard money lender funded $312,000 at 10% and two points. That's 80% of the purchase price — and 80% of the purchase price only. It didn't cover the remaining $78,000 I owed at closing, it didn't cover the $42,000 renovation, and it didn't cover a month of holding costs.

None of those three people were in the lending business. They had money sitting somewhere earning very little, and this was a better place to put it.

The Same Structure, Ten Years Later

Stephanie, one of our students, funded a Minneapolis flip the same way — and for the most instructive reason possible. She didn't plan to use private money. She had capital, but it was already committed to another flip she was running at the same time. When a deal came up she couldn't fund, the choice was find gap money or let it go.

She found gap money. Hard money in first position, private money in second covering the down payment she didn't have. She's since used the same structure on her next deal.

Two investors. Two markets. Ten years apart. Same architecture: roughly 80% senior, the rest filled privately.

Why The Gap Lender Charges More

On Poway, my hard money lender was in first position on a $390,000 property with $312,000 at risk. If everything went wrong and the property sold for $350,000, they'd be made whole.

My three private lenders were behind them. In that same scenario, $350,000 pays off the first lien and leaves $38,000 to split among people owed $126,000. That's the risk they're pricing. Not greed — position.

(That scenario is illustrative. Poway sold for $535,000 and nobody lost money.)

What This Means If You're The One Being Asked

If someone brings you a deal like this, the first question isn't the rate. It's your position.

Second-position money can be a good investment — Poway paid back three people who were earning almost nothing on that cash. But you're the one absorbing the first loss, and you should be paid accordingly and know exactly what's ahead of you. More on evaluating that in the section on becoming a lender.

What Private Money Actually Costs

That's the whole framework. Everything else — your experience, the property, the market — moves the number a point or two. Lien position moves it several.

Lien position is the order lenders get repaid when the property sells. First position gets paid in full before second position gets anything. If the deal goes badly and there isn't enough money to go around, the second-position lender is the one who eats the loss. They price for that.

So the useful question isn't "is private money cheaper than hard money." It's "what position is this money in."

A private lender in first position — a friend, a family member, someone you met at an investors association — is taking the same risk a hard money lender would take, and can often beat the hard money rate because they don't have an office, underwriters, or a marketing budget to pay for. That's the version most articles describe.

But that's not how most deals get funded. Most deals get funded with hard money in first position covering about 80%, and private money in second position covering the rest. In that structure, the private money almost always costs more.

The Numbers, Current As Of 2026

Origination data backs the first-position figures. One loan-documents provider put the average Texas private money rate at 10.14% in Q2 2026; another data provider reported 9.38% in Q1 2026, with 3.0 points, 71% LTV, and an average loan of $370,300. Those are actual closed loans, not advertised rates.

Second-position pricing is harder to pin down because it's negotiated privately and rarely reported. Treat 12% to 14% as a working range, not a quote.

These are 2026 figures and lending rates move. Confirm current pricing directly with your own lenders before you build a deal around any number on this page. This is educational information, not financial advice.

How To Calculate What A Loan Actually Costs You

You should be able to do this in your head before you take a call with a lender.

Borrow $80,000 at 10% for a full year and you owe $8,000 in interest. But you're not holding the property for a year — a six-month project means you halve it. $4,000.

Then add the points. One point is 1% of the loan amount, paid at closing. Three points on that $80,000 is $2,400 out of pocket on day one, before you've swung a hammer.

So the real cost of that $80,000 over six months is about $6,400, not $4,000. Points are why the interest rate alone never tells you what capital costs.

Loan-To-Value: How Much They'll Actually Lend

Private and hard money lenders don't lend against what you're paying. They lend against what the property is worth — either as-is, or after repairs.

ARV (after repair value) is what the property will sell for once renovated. LTV (loan-to-value) is what percentage of that value the lender will fund. Most lenders cap somewhere between 65% and 75%, which is the equity cushion protecting them if you default and they have to sell it themselves.

That cap is exactly why gap funding exists. If a lender funds 75% of a deal, someone has to bring the other 25% — plus rehab, plus carrying costs — and for most investors that someone is a private lender.

Your Lender Is Lending Against Your ARV — Make Sure It Holds Up

Loan-to-value is a percentage of what the property will be worth renovated, which means your ARV determines how much anyone will lend you. Get it wrong and you've borrowed against a number that doesn't exist — and you'll find out at resale. Download our free Comp Criteria Cheatsheet for the exact standards we use to pull comparable sales and defend a valuation, the same criteria a lender will check when you bring them a deal.

The Terms You'll Actually Negotiate

• Rate — annual, usually interest-only.
• Points — 1 to 3, paid at closing, negotiable on repeat business.
• Term — 6 to 24 months, matched to your project timeline plus a buffer.
• Position — first or second; this is the one that sets your price.
• Extension terms — what it costs if you run long, which matters more than beginners expect.

That last one deserves attention. Nearly every private money agreement has an extension clause, and nearly every beginner ignores it until they need it. Ask what an extension costs before you sign, not in week 15 of a 16-week project.

An Alternative Almost Nobody Mentions: Split The Profit Instead

You don't have to pay interest at all.

We've structured private money deals where the lender takes no monthly interest and instead takes a share of the profit at closing — 50/50, 70/30, whatever the deal supports. It changes the risk for both sides. The lender gives up guaranteed monthly income for a bigger potential payday. You give up profit but stop bleeding cash every month on a project that might run long.

For a first-time borrower with a thin margin and an uncertain timeline, that trade can be the difference between a deal that works and one that doesn't. It's worth asking about.

The Honest Math: A $149,000 Spread That Paid $35,000

This is Stephanie's third flip, the one she funded with hard money in first position and private money in second.

On paper it looked excellent. A mid-century house in an affluent Minneapolis suburb, bought above asking at $421,000 because she'd run the numbers and knew the neighborhood supported an ARV near $700,000. She finished the basement and added close to 1,000 square feet of livable space. It sold for $705,000, right where she projected.

The renovation was supposed to take 16 weeks. It took 28.

Where $149,000 Becomes $35,000

Let's be precise, because it isn't all interest.

A $705,000 sale carries real transaction costs. Agent commissions on a sale that size typically run in the tens of thousands. Add closing costs on both the purchase and the sale, permits — which on one of her deals came to about $3,500 when she'd budgeted $1,500 — insurance, utilities, and property taxes for every month she owned it.

Then add the financing. Two lenders, both accruing, one of them second-position and priced accordingly. Every one of those costs is calculated per month, and she paid twelve extra weeks of them.

That's the mechanism. Not one disaster. A dozen line items that were all fine at 16 weeks and all painful at 28.

Why The Timeline Went

Two reasons, both worth knowing before your first deal.

Permits. She had to demolish and rebuild a detached garage, and city approval took months. Permit costs also came in more than double her estimate, because the fee was calculated as a percentage of the renovation budget rather than a flat charge.

One contractor, two projects. She hired the same general contractor to run this flip and another one simultaneously. When one project hit permit delays, his crews scattered to other work. Both projects ran long — 28 weeks and 32 weeks, against 16-week plans on each.

Her assessment was blunt: she shouldn't have done it, and he shouldn't have said he could.

What This Means For Your Numbers

Run your deal at your realistic timeline, then run it again at double.

If the deal still works at double the hold time, you have a real margin. If it only works at 16 weeks, you don't have a margin — you have a schedule, and schedules slip. Stephanie's deal survived doubling. It paid $35,000 instead of what it should have. That's a bad outcome, not a catastrophe, and the difference is that she had room.

The specific trap with second-position money: it's usually the most expensive capital in your stack, and it's usually the capital you hold longest, because it funds the rehab and the carry rather than the purchase. When the timeline stretches, your priciest money is the money that's still outstanding.

Your Rehab Budget Is What Your Private Money Actually Pays For

Hard money covers the purchase. Private money covers the renovation — which means every dollar you underestimate on repairs is a dollar you borrow at your most expensive rate, for longer than you planned. One flip in this guide went from a $170,000 repair bid to $205,000 because the electrical and foundation work was estimated rather than formally bid. Download our free Scope of Work Template to itemize every repair before you borrow, hand contractors a clear plan, and get hard numbers instead of guesses.

When Private Money Is The Wrong Answer

Naming this plainly, because most articles on this topic won't.

• Skip it if your margin is thin. If your projected profit is $30,000 and your financing costs run $2,000 a month, a three-month overrun erases a fifth of it. Thin-margin deals and expensive capital are a bad pairing.
• Skip it if you can't answer what happens when you run long. Not if — when. If you don't know what an extension costs or where the payments come from in month 18, you're not ready to borrow at these rates.
• Skip it if the relationship can't survive the deal. Borrowing from a friend or family member in second position means that if the deal goes badly, the person who loses money is someone you'll see at Thanksgiving. Some relationships can hold that. Some can't. Be honest about which one you're in before you take the money.
• Skip it if you're buying a rental you'll hold. Short-term money at 9% to 14% is priced for a project with an exit in 6 to 24 months. If your plan is to hold long-term and you don't have a refinance lined up, this is the wrong tool.

The figures above come from real deals and are shared for educational purposes. Every project carries risk, and results vary with the property, the market, the timeline, and the terms you negotiate. Nothing here is financial advice — run your own numbers and consult your own advisors before borrowing.

Hard Money Lender vs. Private Money Lender

That single distinction explains most of the rest.

A hard money lender has an office, underwriters, a marketing budget, and a standardized process. You get predictability, speed, and a rate card — and you pay for the infrastructure. A private lender has none of that overhead, which is why a private lender in first position can sometimes beat a hard money rate. It's also why they're harder to find and why terms are negotiated rather than quoted.

The reliability line matters more than it looks. A hard money lender has capital committed and a process that closes. An individual can get cold feet, have a family emergency, or decide two weeks before closing that they'd rather not. Confirm funds are ready before you're depending on them.

Most investors don't choose between the two. They use both — hard money for the bulk of the purchase, private money for the gap.

Where Private Money Lenders Come From

Hard money lenders are corporations — they run ads, they're on social media, they're actively looking for you. Private lenders are individuals with capital who aren't marketing themselves at all. All three of my Poway lenders came from those ordinary channels: a real estate investors association meeting, college, and a friend of a friend.

One shortcut worth knowing: your hard money lender often knows who fills the gaps. They work alongside second-position lenders constantly and can point you toward the ones they trust.

Finding, vetting, and building a working list of lenders is its own discipline, and we've covered it properly in a dedicated guide: how to find private money lenders.

What To Put In Front Of A Lender

You should know all six before you make the call.

• Purchase price — what you're paying.
• ARV — what it sells for renovated, with the comparable sales that support it.
• Rehab budget — what the work costs, ideally from actual contractor bids rather than estimates.
• Timeline — how long from close to sale.
• Exit — sale, refinance, or hold, and what happens if the first one doesn't work.
• Their return — rate, points, position, and when they're repaid.

The one that separates amateurs from professionals is the ARV. Anyone can assert a number. Bring recent sales of similar size in the same neighborhood in renovated condition, and you've shown your work.

Two things most borrowers leave out. Name the risks before you're asked — say the timeline could slip and what that costs. And be explicit about lien position. If you're asking someone to sit behind a hard money first lien, say so plainly and price it accordingly. Discovering that later is how relationships end.

If it's your first deal, say so. A first-timer with real bids, real comps, and an honest cushion is a better risk than someone vague about a track record that doesn't check out.

Everything else about approaching lenders — how to open the conversation, what to do when someone hesitates, how to build the relationship over time — we've covered separately in our guide on raising capital for real estate deals.

How To Become A Private Money Lender

Everything so far has been written for the person who needs capital. Now the other side.

You need capital and a willingness to do real diligence. You do not need a finance background.

Here's the part worth sitting with: the three people who funded my Poway flip weren't lenders. One I met at an investors association meeting, one I knew from college, one was a friend of a friend. They had money in savings accounts earning close to nothing. A lot of people don't realize this is available to them at all.

If that's you — capital sitting somewhere earning very little, and you'd rather have it secured by a house down the street — this section is how it works.

What You Actually Earn

Your return has three components, and only the first is obvious.

• Interest. Annual rate, usually paid monthly, interest-only. First position runs around 9% to 12%; second position more, because you're repaid last.
• Points. One point equals 1% of the loan, paid to you at closing. Two points on a $100,000 loan is $2,000 the day it funds. Points are how you get compensated for the work of underwriting and the risk of committing capital.
• Time. This is the one people miss. A 10% annual rate on a loan repaid in six months earns you 5%, not 10% — you only hold it half a year. Short projects mean your money comes back sooner, which is good for safety and less good for total yield.

This example is illustrative, not a projection. Actual returns depend on the deal, the borrower, your lien position, and whether the loan is repaid on schedule. Lending money carries real risk of loss, including loss of principal. This is educational information, not financial or investment advice — consult your own advisors before lending.

What To Look At Before You Lend

Four things, in order of how much they matter.

1. Your lien position. Ask first, not last. First position means you're repaid in full before anyone else. Second means you're behind another lender and you absorb the loss first if the deal goes wrong. Second position isn't bad — it should simply pay you more. What's bad is not knowing which one you're in.

2. The equity cushion. How much is the property worth, and how much are you and everyone ahead of you lending against it? If the combined loans total 70% of realistic value, there's a 30% cushion before anyone loses money. If it's 90%, there's almost none. Get your own read on value — don't take the borrower's ARV at face value. They're optimistic by nature; that's what makes them investors.

3. The exit. How does your money come back? Sale, refinance, or something vaguer. Vaguer is a problem. If the plan is "sell it," ask what happens if it doesn't sell in the projected window, because the answer determines whether you get repaid on schedule.

4. The borrower. Experience matters less than honesty about experience. A first-timer who says "this is my first deal, here's my contractor, here's my budget, here's my cushion" is a better risk than someone vague about a track record that doesn't check out. Ask for past deals. Ask what went wrong on them. Anyone who says nothing has ever gone wrong either hasn't done many deals or isn't telling you the truth.

The Timeline Question Nobody Asks

Ask what happens if the project runs long. Then assume it will.

Stephanie's third flip was budgeted at 16 weeks and took 28. Her second took 32. Neither was a disaster — but her lenders were owed interest for twelve and sixteen extra weeks, and the money was tied up far longer than anyone planned.

For a lender, an overrun cuts both ways. More months of interest, which is more income. And more months of your capital sitting in a deal you thought would be finished, on a project that's now behind schedule. Set your extension terms in the note up front. What the rate becomes, what it costs, how long you'll allow. Do it before you fund, not in month seven.

Getting Paid Without Interest: The Profit Split

There's an alternative structure worth knowing.

Instead of monthly interest, you take a share of the profit at closing — 50/50, 70/30, whatever the deal supports. You give up guaranteed monthly income for a larger potential payday. The borrower stops bleeding cash monthly, which matters most on exactly the thin-margin deals where a fixed payment is hardest to carry.

It's a genuinely different risk profile. Interest pays you whether the deal is profitable or not, as long as the borrower can service it. A profit split pays you well when the deal goes well and pays you nothing when it doesn't. Neither is right in general. Know which one you're signing.

Protecting Your Money

Passive Or Active

Two ways to do this.

Passive: lend, collect interest, get repaid. You're a lienholder. Minimal time, defined return, no upside beyond your rate.

Active: joint venture the deal, share the profit, involve yourself in decisions. More upside, materially more time, and more entanglement if things go sideways.

Most people who want private lending want the passive version — that's the appeal. Be honest with yourself about which one you're signing up for, because a profit split with a borrower who wants your input is not passive income.

Some lenders also lend through a self-directed IRA rather than a personal account, which changes the tax treatment of the interest you earn. Talk to a CPA before structuring anything that way.

Is Private Money Lending Legal?

This section is educational and explains how these rules generally work — it is not legal advice. Lending laws differ by state and change over time. Confirm your specific situation with a licensed attorney before you lend.

A one-to-one loan on an investment property is the simplest case; almost everything else warrants a lawyer. Here's why the distinction matters, because getting it backwards is how people get into trouble.

The Two Questions That Are Actually Different

Most articles collapse these into one. They aren't the same question and they have different answers.

Question one: are you selling a security? This is about where the money comes from. Lending your own capital is one thing. Raising capital from other people to lend is a different thing, and it can put you squarely inside securities law.

Question two: do you need a lending license? This is about what you're lending on and to whom. It's state law, it varies enormously, and it turns on whether the loan is for consumer or business purposes.

You can be clean on one and exposed on the other.

When Securities Law Enters The Picture

If you lend your own money directly to one borrower, secured by a note and a lien on the property, you're generally making a loan — not selling a security. That's the ordinary private money transaction this guide describes.

It changes when you pool other people's money.

Take money from several people, combine it into a fund, and lend it out while you make the decisions, and you may be selling a security to those people. The legal test turns on whether they're relying on your skill and effort for their return. Industry counsel has been explicit that fractional interests in a promissory note can constitute securities where the investor commits modest sums expecting profit from the promoter's skill and solvency — and that many private lenders wrongly believe a private relationship alone exempts them from securities laws.

Rule 506(b) of Regulation D gets cited constantly in this context, and it's worth being precise about what it is. It's a safe harbor for companies offering securities, providing objective standards to meet an exemption from registration, where public advertising and general solicitation are incompatible with the private placement exemption. It is an exemption for offerings. It is not a license, and it is not authority for making loans. If someone tells you a private placement exemption lets you lend, they've confused two different things.

The practical line: your own money, one borrower, one loan — ordinary lending. Other people's money, pooled, deployed at your discretion — talk to a securities attorney before you take a dollar.

When You Might Need A Lending License

Separate question, separate law, and this is where the real exposure sits for most people.

The dividing line is consumer purpose versus business purpose.

A loan to someone buying a house to live in is a consumer loan, and consumer mortgage lending is heavily regulated. A loan to an investor buying a property to renovate and resell is a business-purpose loan, and it's treated differently in most states.

That distinction is less clean than it should be. Under the SAFE Act, a residential mortgage loan is defined as a loan primarily for personal, family, or household use secured by a dwelling — but the act contains no explicit exemption for business-purpose lending, which led some state regulators to write licensing rules covering more than consumer loans. Industry groups have argued for years that this was never the intent.

The result is a patchwork. Some states require licensing or registration even for business-purpose loans, while others have de minimis exceptions letting you make a small number of loans without one. In Florida, for instance, the licensing analysis turns partly on whether the loans are nonresidential and who holds title.

Two things to take from that. First, "I'm lending my own money" is not by itself an answer to the licensing question. Second, the answer depends on your state, and you have to actually look it up rather than assume.

What To Do Before You Lend

The Honest Summary

Ordinary private money lending — your own capital, one investor borrower, one investment property, properly documented — is legal and routine, and thousands of people do it every year.

The trouble starts at two specific edges: lending against homes people live in, and raising money from others to lend. Both are doable and both are done legally every day, but neither is a do-it-yourself project.

Private Money Lending FAQs

Final Thoughts On Private Money Lending

Private money lending comes down to one question that most people ask last: where does this money sit in line to get paid back?

Answer that and everything else follows. You know why the gap lender charges more than the hard money lender. You know why your rate isn't really about who the lender is. You know what you're risking if you're the one writing the check, and what you're actually paying for if you're the one taking it.

The investors who do well with borrowed money aren't the ones who found the cheapest rate. They're the ones who understood what the money cost across the whole hold, built in room for a timeline that ran long, and knew their position before they signed. Stephanie's flip had a $149,000 spread and paid $35,000 — and it still worked, because there was enough margin to absorb twelve extra weeks. A thinner deal wouldn't have survived it.

That's the whole discipline. Know what your capital costs, know where it sits, and don't borrow against a timeline you can't defend.

About The Author

Alex Martinez

Founder & CEO, Real Estate Skills

Alex Martinez is the Founder and CEO of Real Estate Skills. With more than a decade of investing experience and 33+ residential properties acquired, he has funded his own fix-and-flip projects using both hard money and private money lenders since his first deal in 2015. Through Real Estate Skills, Alex and his team have helped thousands of students learn how to find deals, structure financing, and close profitable real estate transactions.

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Real Estate Skills is not a law firm, and the information in this article is provided for educational purposes only — it does not constitute legal, tax, or financial advice. Private money lending laws, licensing requirements, and securities rules vary by state and change over time. Lending and borrowing money against real estate carry risk, including the risk of losing your principal, and the results described here reflect specific deals under specific conditions — past results do not guarantee future outcomes. Always consult a licensed real estate attorney and your own tax and financial advisors before lending, borrowing, or entering into any transaction.