Private Lending For Real Estate Investors: What You Need To Know

Many real estate investors use private money lenders to finance their investment properties. Investing in real estate is much different from buying a primary residence and becoming a homeowner. Getting approval for a traditional mortgage can be lengthy, and investors need to move quickly once they spot a great deal on an investment opportunity.

Private money lending is often better for investors because the approval criteria are much less strict, and a private lender doesn’t work under any major financial institution, like a central bank. This allows a private lender to be more flexible and set their own lending criteria, which means real estate investors can typically have their loan application approved (and receive their funds) in days, not weeks.

What Is a Private Money Loan?

A private money loan is a type of short-term loan commonly used by investors to finance real estate projects. Private lenders aren’t bound by the rules and regulations set by a traditional bank or other financial institutions, making them an attractive loan option to real estate investors looking to move quickly. 

Many private lending companies are also much more flexible about the properties they will provide funding for and often specialize in complex loan requests like developer financing and blanket loans; many banks would not take on this type of financial risk. Since private lenders work for themselves, they can determine the level of risk they’re willing to take on. 

How Does a Private Money Lender Differ From a Hard Money Lender?

Many real estate investors use private money lenders to finance their investment properties. Investing in real estate is much different from buying a primary residence. Getting approval for a traditional mortgage can be lengthy, and investors need to move quickly once they spot a great deal on an investment property. 

Private lending is better for investors because the approval criteria are much less strict, and a private lender doesn’t work under any major financial institution, like a central bank. This allows a private lender to be more flexible and set their own lending criteria, which means real estate investors can typically have their loan application approved (and receive their funds) in days, not weeks.

These loans offer a more personal, flexible, and accessible lending option, often with less restrictive requirements than traditional loans. The application and underwriting process is typically less rigorous, and the lender generally allows the borrower more freedom in how they use the loan.

On the other hand, a hard money loan is designed for speed and accessibility, focusing on the borrower's assets as collateral rather than their credit score or income. This type of loan can provide cash quickly, even for those with poor or non-existent credit histories. Like private money loans, hard money loans also offer flexibility in how the funds can be used.

While both loan types can be beneficial, the right choice depends on the borrower's specific needs. Private money loans may be a better option for those with below-average credit scores or who are trying to build credit. Hard money loans can be a good choice for those who need cash quickly or those with poor credit histories. Do your due diligence and consider all your options before making a decision. 

What Do Private Lenders Consider Before Offering a Loan?

Before offering a loan to an investor, a private lender will look at certain factors to assess their ability to pay it back. Here are some of the most commonly considered factors when a lender is reviewing a loan application. 

  • Collateral
  • Experience
  • Exit strategy
  • Borrower credit history
  • Income


Collateral is an asset a borrower offers to assure a lender they’ll receive the payment no matter what (ex: real estate). If the borrower cannot pay back the loan for any reason, the private lender can seize the asset. Collateral must have a high value that does not stand to depreciate over time and be easy to cash out on if it becomes necessary.

Private lenders for real estate financing will set their own parameters for the types of collateral they will lend on. For example, some lenders will only lend on residential assets, whereas other lenders will lend on commercial and land assets as well. The location of the asset also plays a role, as many lenders like to focus on specific markets (ex: South Florida).


If a real estate investor is just starting out, they likely won’t have many success stories to prove reliability. If you’re new to the industry and this is your first time securing a private loan, it won’t necessarily impact loan approval, but you could be faced with higher interest rates or be asked to pay a higher down payment than you expected. It is always recommended to share your portfolio of work with your lender or provide them with a business plan, so they can get a better sense of your experience and/or investment strategy. 

Exit Strategy

Real estate investors should have exit strategies. An exit strategy is a way to back out of a real estate deal while (hopefully) losing as little money as possible. Most private lenders will require you to have an exit strategy to pay off the loan amount at maturity. Some common exit strategies among borrowers for a private loan include refinancing, securing a construction loan (for vacant land), using income from another business venture, or selling the asset. 

Borrower Credit 

Private loan approvals are not credit score driven, which means there is typically no minimum FICO score required. However, a private mortgage lender may pull your credit to ensure your credit history does not show any recent bankruptcies or foreclosures. So if a real estate investor doesn’t have a great credit score, or no credit history in the U.S. at all, but their financial standing and the quality of the asset is sound, a loan with a private lender would still be a good option for them. 

Borrower Income

The good thing about private lenders is that they often require less income documentation than conventional loans from a traditional bank. Instead of requesting two years worth of tax returns, pay stubs, and W2s, a private lender may only ask for a copy of your most recent bank statement that shows enough liquidity and cash flow to cover 6-12 months of interest payments. 

Strategies to Negotiate Better Loan Terms

Negotiation plays a crucial role within the realm of private lending. Unlike traditional lenders, private lenders often have the flexibility to adjust loan terms based on individual circumstances. This means that with the right approach, you can negotiate better loan terms and lower interest rates that align with your financial goals and investment strategy. 

Here's how you can do it:

Building a Strong Relationship With the Lender

Developing a strong relationship with your lender can be a game-changer when it comes to negotiating loan terms. This doesn't mean simply maintaining a professional rapport; it involves demonstrating your reliability as a borrower and your commitment to the investment. 

Regular communication, timely repayments, and transparency about your financial situation can all contribute to a strong lender-borrower relationship. Lenders who trust their borrowers are more likely to be flexible with the loan terms.

Demonstrating a Successful Track Record

Your past performance as a real estate investor can significantly influence your negotiation power. A successful track record shows the lender that you're capable of managing your investments effectively and have the potential to repay the loan. If you've consistently made profitable real estate investments, used loans responsibly, and maintained a good credit history, you're more likely to negotiate favorable loan terms.

Offering Additional Collateral

Offering additional collateral can provide the lender with an extra layer of security, making them more inclined to negotiate the loan terms in your favor. This could be other properties you own, valuable assets, or even equity in the investment property you're planning to purchase. However, keep in mind that offering additional collateral also means taking on more risk, so evaluate this strategy carefully.

Creating a Solid Business Plan and Exit Strategy

Lenders want to see that you have a clear plan for your investment, including a well-thought-out exit strategy. A comprehensive business plan should detail how you intend to generate profits from your investment property, while an exit strategy should outline how you plan to repay the loan at maturity. This reassures the lender that you've thoroughly considered all aspects of the investment and have contingencies in place, making you a less risky borrower.

Advantages of Private Lenders

Many advantages come with private money loans, especially if you’re a real estate investor. Here are a few upsides to obtaining a loan from a private lender. 

  • The loan terms are more flexible. Since private lenders work alone, investors will have a much easier time structuring loan terms that fit their investment needs.
  • The approval process is typically quicker. With many banks and financial institutions, getting approved for a loan is quite a lengthy ordeal. Private lenders usually don’t have to adhere to the same rules and can approve a loan in 1-2 days.
  • Loans on properties banks won’t take on. Private lenders often see value where other lenders do not, and are more willing to take on the risk. 
  • A private lender loan could be a great option if you’re a real estate investor looking for reliable access to capital to put towards your next investment purchase. A private real estate loan can also be used to tap into your property’s equity with a cash-out refinance. 

Disadvantages of Private Lenders

As with anything, it’s smart to consider the risks. While they are usually easier to approve, private money loans also have downsides.

  • Interest only. Most private loans are interest only. This means your monthly payment will only cover the interest, and the principal amount will be due as a lump sum at loan maturity. This can be an advantage, as it keeps your monthly payment low until you you can refinance. 
  • Shorter loan term. Private loans have much shorter repayment periods than standard mortgage loans. This means monthly payments will be more expensive compared to a traditional 15-30 year mortgage. 
  • Investment property only. Most private loans are considered commercial loans, or business purpose loans. This means the asset must be an investment property. A residential home, apartment, or multifamily rental property can be financed with a private loan, but the owner cannot use the property as a primary residence or second home. 

If you’re considering a private loan to fund your investment property, make sure you’re aware of the potential risks associated with taking on this level of responsibility. Make sure to work with a mortgage professional who can guide you through your options.

What Types of Properties Ideal for Private Lending?

Private lending offers a flexible financing solution for a variety of property types that may not meet the criteria of traditional banks. Due to their independence and risk tolerance, private lenders often finance properties that banks view as too risky. 

Here are some types of properties that are ideal for private lending.

Luxury Residential Assets

Luxury residential assets, particularly those valued over $3M, are well-suited for private lending. Most banks may be unable or unwilling to finance such high-value properties due to their risk management policies and regulatory restrictions. 

However, private lenders, with their flexibility and less stringent criteria, can often step in to fill this gap. They can offer loans to finance these luxury properties, provided the borrower has a strong financial profile and a clear plan for the property.

Vacant Land for Spec Home Development

Buying vacant land, particularly for speculative home development, is another category of property that can benefit from private lending. Speculative or "spec" home development involves purchasing land, building a home without a specific buyer in mind, and then selling the property. This type of investment is considered high risk, as it relies on the property market's strength and the developer's ability to sell the completed home at a profit.

Unlike traditional banks, many private lenders have an appetite for this type of risk, especially if the borrower has a track record of successful spec home development. However, each lender will have different criteria. Some might require the borrower to have a certain level of experience in property development, while others might place more emphasis on the location and potential value of the land.

Regulations To Consider With Private Lender Loans

Private money lenders must follow federal and state usury laws, and they can still be subject to certain regulations even though they work independently. In some states, private lenders must own a banking license if they want to lend over a certain amount in loans.

Who Should Consider Private Lender Loans?

Private money loans are ideal for real estate investors who are faced with contractual obligations that require a fast closing, or are still in the process of qualifying for long-term financing. 

Private lender loans are also great for investors who own an investment property free and clear, and would like to tap into the property’s equity to reinvest, pay off other debts, or renovate the property. A cash-out loan through a private lender requires minimal documentation, allowing real estate investors to receive their cash proceeds in days, not weeks. 

Final Thoughts

At Vaster, we want to ensure that you have all the tools you need to succeed in real estate, whether you’re buying a new investment property or refinancing. We design custom mortgage solutions to fit every need and help buyers and investors close quickly. 

Our skilled team makes the entire process easy and is by your side every step of the way. So whether you’re looking to land your next investment property or you're very first — we can help you get the funds you need to make the deal happen. Reach out to us today.


Collateral Definition, Types, & Examples | Investopedia

What's Your Real Estate Investment Exit Strategy? | Forbes

Exit Strategy Definition for an Investment or Business | Investopedia

How Long Does Foreclosure Stay on your Credit Report? | CNBC

Investing in Luxury Real Estate | Investopedia

Complete Checklist of Documents Needed for a Mortgage | US News

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