How to Become a Private Money Lender for Real Estate

To become a private money lender for real estate, you lend your own cash or self-directed IRA funds to a real estate buyer, and the loan is secured by a specific property through a promissory note and a recorded mortgage. Most of the work happens up front: deciding where the money comes from, learning to vet a borrower and a deal, and making sure the paperwork protects you. Here’s how it works, step by step.

The short answer

A private money lender is an individual, not a bank, who funds a loan secured by real estate. To get started:

1. Decide whether you’ll lend cash or funds from a self-directed IRA.
2. Find a borrower with a real track record, and talk with them before any deal is on the table.
3. Vet each deal on its numbers: purchase price, repair estimate, after-repair value and exit plan.
4. Close the loan with a promissory note, a recorded mortgage (or deed of trust) and a lender’s title insurance policy.
5. Get repaid on the terms written into the note.

Rules on lending, licensing and interest limits vary by state, so have a real estate attorney in the property’s state review your first loan.

What does a private money lender do?

Investors who buy houses that need work often can’t use, or don’t want, a bank loan. Banks can take weeks to approve a mortgage, and many won’t lend on a house with a failing roof or no working kitchen. A private lender fills that gap. You provide the money to buy, and sometimes repair, a specific house. The borrower handles the property, and you’re repaid when the house is sold or refinanced.

You’re not a landlord or a contractor. You don’t deal with tenants, repairs or showings. What you hold is a debt secured by real estate, and your job is to decide which loans are worth making.

Should you lend cash or self-directed IRA funds?

Both work, but they follow different rules.

If you lend from an IRA, the IRS rules on prohibited transactions matter. Your IRA generally can’t deal with “disqualified persons,” a group that includes you, your spouse, your parents and grandparents, and your children and grandchildren and their spouses. If a prohibited transaction happens, the account can stop being an IRA as of the first day of that year and be treated as if it were fully distributed to you.

Also know what a custodian does and doesn’t do. It holds and administers the assets in your account. It doesn’t check whether an investment is sound or legitimate. The SEC’s investor alert on self-directed IRAs explains this well. The due diligence is yours.

How do you vet a borrower?

The borrower matters as much as the house. Before you fund anything, find out:

• Track record. How many houses have they bought, renovated and sold? Can they show you past projects?
• Time in business. A company that has worked through slow markets has had to solve the problems you’ll want them to solve on your loan.
• Reputation. Read reviews from people they’ve worked with, and check court and county records for lawsuits or liens.
• Willingness to talk. A good borrower wants a conversation before you lend, answers questions plainly and doesn’t rush you.
• Red flags. Promises of guaranteed returns, pressure to decide today, or vague answers about where your money goes.

How do you vet a deal?

Every loan should come with the numbers. Four matter most:

1. Purchase price. What the borrower is paying for the house. A good buy leaves room for surprises.
2. Repair estimate. A line-by-line scope of work. Ask who wrote it and how past estimates compared with actual costs. Repairs are where budgets most often slip.
3. After-repair value (ARV). What the house should sell for once it’s fixed, based on recent sales of similar homes nearby. Check those comparable sales yourself.
4. Exit plan. How you get repaid: usually a sale of the finished house, sometimes a refinance. Ask what happens if the house takes longer to sell than planned.

The key question is how much cushion sits between the loan amount and what the property is worth. The bigger that gap, the more room there is if repairs run over or prices dip. To see how buyers arrive at a purchase price in the first place, our guide to how cash home buyers calculate offers walks through the math, and our guide on fixing up a house versus selling as-is shows which repairs tend to pay off.

What documents protect a private lender?

• Promissory note. The borrower’s written promise to repay. It sets the loan amount, payment terms, payoff date and what happens if payments are late.
• Recorded mortgage or deed of trust. This ties the loan to the property and is recorded with the county, so it’s public record. Some states use a deed of trust instead of a mortgage. Either way, it gives you a claim against the property if the loan isn’t repaid.
• Lender’s title insurance policy. Protects your lien against covered title problems, like an unknown earlier lien or a defect in the chain of ownership.
• Property insurance. Ask to be listed on the borrower’s policy as the mortgagee, so you’re protected if the house is damaged.

A title company or real estate attorney usually prepares and records the documents at closing. Have your own attorney review them, at least on your first loan.

One lender per deal or pooled funds?

Some real estate companies raise money into a pooled fund and spread it across many properties. Others match one lender to one house.

• One lender per deal. You know exactly which property secures your money, you see its numbers, and the mortgage names you. You decide deal by deal.
• Pooled funds. Your money is spread across many properties, which spreads risk, but you usually don’t hold a lien on a specific house. Pooled offerings are often securities with their own disclosure documents.

Neither is right for everyone. If you want to see and choose each property, one lender per deal fits better. If you’d rather not review deals yourself, a pooled fund may suit you, but read its offering documents closely.

How BAM works with private lenders

BAM has bought houses for more than 20 years, has purchased more than 500 of them, and has earned 120+ five-star ratings from homeowners. Private lenders help us close quickly for homeowners who need to sell as-is. Here’s how it works:

1. Talk first. You join our private lender list, and we call to learn what you’re looking for and answer your questions. We only share deals with lenders we’ve spoken with and approved.
2. See deals. Once you’re approved, we email you current deals, and they’re also available to you on our website.
3. Fund one house. Each loan funds one property for one lender, with a promissory note, a recorded mortgage and a title insurance policy. Nothing is pooled.
4. Get repaid. Terms and the payoff date are set for each deal, discussed with you privately and written into the note before closing.

Each deal comes with the purchase price, repair estimate and our plan for the property, so you can make your own call. To learn more about who we are, see about BAM Home Buyers, read reviews from homeowners we’ve worked with, or see how we buy houses as-is.

What are the risks of private money lending?

Private lending isn’t risk-free, and anyone who says otherwise is waving a red flag. You can lose some or all of your principal. Home values can fall, repairs can cost more than planned, and a sale can take longer than expected. If a borrower doesn’t repay, foreclosing takes time and money and follows each state’s rules, which differ a lot. Your money is also tied up until the loan is repaid, so only lend funds you won’t need on short notice.

Ready to get started?

If you’d like to fund real estate loans secured by specific houses, join our private lender list and we’ll set up a call, or call us at (312) 818-3954. And if you’re a homeowner who needs to sell, you can get a free cash offer instead.

This is general information, not an offer of any investment and not legal, tax or financial advice. Every loan carries risk, including loss of principal. Talk with your own financial, tax and legal advisors before lending.