Private Lending in Real Estate: How to Earn 8-12% as the Bank
Quick Answer
Private real estate lending means you lend money to real estate investors, secured by a mortgage on the property, and earn interest of 8–12% annually. You're in the bank's position: predictable returns, no landlord responsibilities, and the property as collateral. Done correctly with adequate security, private lending is lower risk than equity investing—but requires careful due diligence on both the borrower and the property.
How Private Lending Works
You become the lender, and a real estate investor is your borrower:
- Borrower finds a fix-and-flip or rental property opportunity
- You loan them a portion of the purchase/renovation funds
- Loan is secured by a mortgage recorded against the property
- Borrower pays monthly interest (and sometimes principal)
- At term, borrower repays principal from sale proceeds or refinancing
- If borrower defaults, you can foreclose and recover the property
Example:
- Borrower buys a house for $180,000, plans $45,000 renovation, ARV $280,000
- You lend $162,000 (65% of ARV) at 10% interest
- Loan term: 12 months
- Your income: $162,000 × 10% = $16,200/year
- Your security: First mortgage on property worth $280,000 (your loan is 58% of ARV)
Key protection: Your $162,000 loan is secured by a $280,000 property. Borrower must lose 42% of property value before your principal is at risk.
Loan-to-Value: Your Primary Safety Net
Loan-to-Value (LTV) is the percentage of property value your loan represents. Lower LTV = more equity cushion = safer loan.
| LTV | Your Protection | Risk Level |
|---|---|---|
| 50% | 50% property decline before principal at risk | Very Low |
| 60% | 40% property decline before principal at risk | Low |
| 70% | 30% property decline before principal at risk | Moderate |
| 80% | 20% property decline before principal at risk | Higher |
| 90%+ | Minimal cushion | High—don't lend here |
Rule of thumb: Never lend more than 65–70% of ARV (after repair value) on fix-and-flip loans. Never lend more than 70–75% of current market value on stabilized rentals.
Important: Always base LTV on a current appraisal or comparable sales analysis—not the borrower's optimistic estimate.
Returns: What to Expect
Private lending rates in 2026:
| Loan Type | Typical Rate | Points | Term |
|---|---|---|---|
| Fix-and-flip (first position) | 10–14% | 2–3 points | 6–18 months |
| Bridge loan (stabilized property) | 9–12% | 1–2 points | 12–24 months |
| Rental DSCR (long-term hold) | 8–10% | 1–2 points | 1–5 years |
| Second position mortgage | 12–16% | 2–4 points | Variable |
| Construction loans | 12–15% | 3–5 points | 12–24 months |
Total yield on a 12-month loan at 12% + 2 points:
- $150,000 loan
- Points: $150,000 × 2% = $3,000 (earned at closing)
- Interest: $150,000 × 12% = $18,000
- Total: $21,000 on $150,000 invested = 14% yield in 12 months
How to Find Borrowers
Local Real Estate Investor Networks
REIA meetings are the most reliable source of borrower leads. Fix-and-flip investors and rental investors in your market are constantly seeking private capital.
Approach: Attend meetings, introduce yourself as a private lender with capital available. Many experienced investors have waiting lists of deals and will welcome reliable private capital.
Real Estate Attorney Referrals
The attorneys who handle real estate closings know the active investors in your market. A conversation with a title attorney can generate borrower referrals.
Online Platforms
Some platforms connect private lenders with borrowers:
- Patch of Land
- Fund That Flip
- Groundfloor (fractional investments in loans)
These platforms handle underwriting and servicing, reducing your due diligence burden—but also reducing your yield.
Personal Network
Other real estate investors you know, members of your church or civic organization who flip houses, colleagues who invest in real estate—the best borrowers come through trusted relationships.
Due Diligence: Protecting Your Capital
Property Due Diligence
Comparable sales analysis: Pull 5+ recent sales of similar properties within 0.5 miles, sold in last 90 days. Verify the ARV is realistic.
In-person inspection: Never lend without seeing the property yourself or having a trusted representative inspect it. Confirm the renovation scope and budget are reasonable.
Appraisal: For loans over $75,000, order an independent appraisal from a licensed appraiser. Cost: $350–$600. Worth every dollar.
Title search: Order a preliminary title search. Ensure you'll be in first lien position (no prior mortgages or superior liens). Use a title company for closings—never close without title insurance.
Property insurance: Require borrower to carry property insurance with you named as mortgagee/loss payee.
Borrower Due Diligence
Track record: How many deals has this borrower completed? Check public records for prior deed transfers. Verify their renovation experience.
Financial capacity: Can they carry the project if something goes wrong? Basic financial statements or bank statements.
Credit check: Pull a credit report. Recent foreclosures or bankruptcies are serious red flags.
Exit strategy: How do they plan to repay? Fix-and-flip (sold at ARV) or refinance (DSCR loan after stabilization)?
Common Mistakes (Do This, Not That)
❌ Mistake 1: Lending to a friend without proper documentation "He's a good friend; we don't need paperwork." When the deal goes sideways (and some will), no documentation means no recourse. You lose both the money and the friendship.
✅ Do this: Use the same documentation for friends as for strangers: promissory note, mortgage/deed of trust, title company closing, title insurance, hazard insurance. The formality protects both parties—not just you.
❌ Mistake 2: Lending based on purchase price rather than ARV A property purchased for $150,000 that has an ARV of $200,000 with $40,000 in renovation—lending at 80% of purchase price ($120,000) seems conservative, but it's actually 60% of ARV. That's fine. But lending at 90% of ARV ($180,000) gives you minimal cushion against renovation overruns or ARV misestimates.
✅ Do this: Always calculate LTV as a percentage of current market value (for rentals) or ARV (for value-add). Never use purchase price as your LTV benchmark—it creates false confidence on discounted distressed deals.
❌ Mistake 3: Not using a title company for closing Private loans documented by borrower-drafted documents and recorded without title insurance leave you exposed to hidden title defects, priority liens, and forgery.
✅ Do this: Always close through a title company or real estate attorney. This ensures proper documentation, title insurance protecting your lien, and correct recording of the mortgage.
Using Your IRA for Private Lending
One of the most powerful private lending strategies: use a Self-Directed IRA (SDIRA) to lend money. All interest income compounds tax-free (Roth) or tax-deferred (Traditional).
Example:
- Lend $100,000 from Roth SDIRA at 11% for 3 years
- Total interest earned: $33,000
- Tax on $33,000 in Roth IRA: $0
- Same loan in taxable account: $33,000 × 32% = $10,560 in taxes owed
IRS rules for SDIRA lending:
- Cannot lend to yourself or "disqualified persons" (family members, fiduciaries)
- Property secures the SDIRA loan, not you personally
- All income and principal return to the IRA, not to you personally
- Use a custodian specializing in SDIRAs (Equity Trust, Entrust, etc.)
See real-estate-ira for detailed SDIRA guidance.
Step-by-Step Private Lending Checklist
- Determine your available capital and desired yield
- Set lending criteria: max LTV (65-70%), minimum loan size, preferred property types
- Network at local REIA meetings to find potential borrowers
- Receive loan request from borrower with deal summary
- Conduct property due diligence: comps, inspection, calculate LTV on ARV
- Conduct borrower due diligence: track record, credit, financial capacity
- Order independent appraisal (loans over $75,000)
- Order preliminary title search
- Draft loan documents with a real estate attorney (promissory note + mortgage/deed of trust)
- Close through a title company; ensure first-lien position with title insurance
- Record mortgage with county clerk
- Receive first payment; monitor loan performance monthly
- At payoff: receive full principal + any outstanding interest; release mortgage
Frequently Asked Questions
Q: How much capital do I need to start private lending? A: Many private lenders start at $30,000–$50,000 per loan on small fix-and-flip deals. Some borrowers need loans starting at $50,000–$75,000. You can participate in fractional loan pools (Groundfloor) starting at much lower amounts.
Q: What happens if my borrower can't repay? A: You initiate foreclosure proceedings in your state court. The process takes 2–12 months depending on state law. After the foreclosure sale, you receive your loan principal (up to the sale proceeds). If the property sells for more than your loan, the excess goes to the borrower. If it sells for less, you may have a deficiency claim depending on state law and your loan documents.
Q: Is private lending regulated? A: Most states allow individuals to lend their own money without a lending license. However, if you're lending regularly as a business or to consumers (not investors), licensing may be required. Investor-to-investor commercial loans are generally exempt from consumer lending regulations.
Q: What's the difference between a mortgage note and a deed of trust? A: Both secure real estate loans. In mortgage states, a mortgage is the security instrument. In deed of trust states (about 30 states), a deed of trust is used instead—it allows non-judicial foreclosure (faster and cheaper). Your state determines which to use; your real estate attorney will know.
Q: Can I charge late fees and prepayment penalties? A: Yes, if specified in the promissory note. Include reasonable late fees ($50–$150 or 5% of payment) and specify whether there's a prepayment penalty. Fix-and-flip borrowers rarely have prepayment penalties since they want to repay as soon as the property sells.
Related Tools
- Real Estate ROI Calculator — Compare private lending returns with equity investing
- Real Estate Leverage Calculator — Understand how leverage affects borrower profitability
- Real Estate IRA Calculator — Model private lending inside tax-advantaged retirement accounts