Private money lending: writing your first loan to a flipper
10–13% plus points, secured in first position with a third of equity beneath you — the practical playbook for lending to rehabbers: underwriting, paperwork, servicing, and the five mistakes that turn lenders into landlords.
How does private money lending work? You lend your capital — often $50–250k per loan — to a rehabber or BRRRR operator for 6–18 months at 10–13% interest plus 1–3 points, secured by a recorded first-position deed of trust on the property, at no more than 65–75% of its value. The borrower gets speed and flexibility no bank offers; you get bond-beating yield with a house as collateral and their equity absorbing losses before yours. It's the natural graduation for investors whose capital has outgrown their appetite for tenants — and a skill trade: the return is earned entirely at underwriting, before the wire.
The anatomy of one loan
Points are charged up front (deducted from the wire or paid at closing), interest typically arrives monthly, and the payoff comes from the borrower's exit — a sale or a refinance takeout you should verify is realistic before funding. Rehab-inclusive loans fund in draws: you (or an inspection service) verify completed work before releasing each tranche — never fund tomorrow's renovation on yesterday's promise.
Underwriting: the five questions
- 01What is the collateral worth — to a skeptic?Your own comps on the as-is value, not the borrower's ARV story. Lend against what it would fetch in 60 days if you had to sell it yourself. The single largest source of lender losses is borrowed optimism about value.
- 02Who is the borrower — with receipts?Completed-deal track record (addresses, numbers, verifiable), credit as character evidence, liquidity for surprises, and references from their previous lenders. First-time flippers get lower LTVs and closer draws, or a polite no. Best practice: lend first to operators you've watched execute.
- 03What position am I in — exactly?First position, confirmed by a title search and insured by a lender's title policy. Seconds are equity risk wearing debt's clothing; price them that way or decline them. Verify taxes are current — property taxes prime everything.
- 04How do I get repaid — twice?Primary exit (sale at a realistic price, or a refi the borrower can actually qualify for) plus the fallback: your own willingness to foreclose and own at your basis. Know your state's foreclosure timeline — 90 days non-judicial vs. 18 months judicial changes what you should charge.
- 05Is the paper bulletproof?Attorney-drafted note and deed of trust, recorded; personal guarantee; insurance listing you as mortgagee/loss payee; entity docs if lending to an LLC. Then hand it to a licensed servicer ($25–50/month) — the neutral record that keeps friendly loans friendly and defaults orderly.
Where the losses actually come from
Not from markets — from skipped steps. Inflated value (lending 70% of a fantasy is lending 95% of reality). Second positions taken for two extra points. Draw sloppiness — funding ahead of work, then holding a half-renovated house worth less than the balance. Paper gaps — unrecorded deeds, lapsed insurance, no title policy — that convert defaults into litigation. Relationship lending without underwriting — the brother-in-law's spreadsheet. The defense is boring consistency, and a temperament note belongs here: when a good borrower hits a real problem, experienced lenders work it out (extensions for a fee, structured catch-ups) because a modification usually beats a foreclosure for everyone. The willingness to foreclose is your leverage; the reluctance to need it is your process.
Scaling the practice
The arc runs: first loan to a proven operator you know → a rotation of 3–5 borrowers you've watched through full cycles → fractional participations with other lenders on larger notes → and eventually a pooled fund with real securities counsel, because the moment you deploy other people's money into your loans, you're issuing securities. Tax placement matters from loan one: interest is ordinary income, making private lending the classic self-directed IRA and Solo 401(k) asset — your taxable account holds the depreciation-sheltered buildings, your retirement account holds the paper. In the twenty-year frame, lending is how Years 7+ capital earns operator-grade yields at one remove: the market knowledge you paid for as a borrower, re-priced as the person behind the table.
Frequently asked questions
+What returns do private money lenders make?
Typical terms to rehabbers run 10–13% annual interest plus 1–3 origination points on 6–18 month loans — roughly 12–16% annualized when capital stays deployed. Returns are contractual and capped; the skill is keeping them, which happens at underwriting: conservative value, first position, proven borrowers, bulletproof paperwork.
+How much money do you need to be a private lender?
Meaningful first-position loans on rehab properties start around $50–100k in most markets. Smaller capital can participate through fractional positions alongside experienced lenders, small-balance notes (mobile homes, land paper), or lending funds. Many lenders start with a single loan to an operator whose deals they already know personally.
+What happens if the borrower doesn't pay?
Your recorded deed of trust lets you foreclose and recover from the property — which is why the golden rule is lending only against collateral you'd happily own at your loan amount. In practice, most troubled loans resolve short of foreclosure: fee-based extensions, workouts, or deed-in-lieu. State foreclosure timelines (90 days non-judicial vs. 1–2 years judicial) should shape both your pricing and your patience.
+Is private lending better than owning rentals?
It's a different season: lending trades appreciation, amortization, and depreciation for contractual yield, zero operations, and structural downside protection. Landlords build wealth; lenders harvest it calmly. Many investors run both — buildings in taxable accounts for the tax shelter, notes in retirement accounts where ordinary interest compounds untaxed.
+Do private lenders need a license?
It varies by state and loan type: business-purpose loans to investor entities are lightly regulated in most states, while consumer-purpose loans (owner-occupants) trigger licensing and federal compliance almost everywhere — most private lenders simply never touch owner-occupied lending. Usury caps, license thresholds by loan count, and servicing rules differ by state; one conversation with a local lending attorney before loan one is the professional standard.
The territory map: note investing and private lending. The mechanics deep-dive: notes and hard money. The borrower's side of the table: the financing ladder.