What is Private Lending?

Private lending in real estate refers to the practice of borrowing money from individuals or groups of individuals rather than from traditional banks or financial institutions. Private lending can provide an alternative source of financing for real estate investments when traditional financing options may not be available or feasible. True private lenders are the decision makers for each loan they fund, they do not need to conform to the same underwriting standards or risk tolerances as institutional lenders (i.e., conventional banks or institutionally backed hard money lenders.)

Private lending can involve a wide range of loan types, including short-term loans, long-term loans, bridge loans, and construction loans. The loan terms and requirements are typically negotiated between the borrower and the lender and may be more flexible than traditional bank loans. Private lenders typically do not lend nation-wide as they do not have the resources to meet the legal standards in all 50 states. Some may lend in a few states, some may lend in a single town, some may only lend to a single trusted borrower. Who they lend to all depends on their level of capital, their personal desires, their level of trust in the borrower, and their risk tolerance.

Private lenders can be individuals or groups of individuals who are interested in investing in real estate and earning a return on their investment. Private lenders may be family members, friends, or other investors who have the capital to lend and are willing to take on the risk of lending to a real estate investor. The process employed by each private lender to fund a deal will vary. It may be very informal or more structured depending on the level of experience with the lender and their relationship to the borrower. But either way, it is likely to be a much faster process than a traditional bank or hard money lender as the person underwriting the loan is usually the same person authorized to distribute funds. Private lenders are usually able to offer speedy closings, streamlined processing, white glove customer service, and loan terms specifically tailored to meet the needs of the borrower, etc.

The biggest item to note when searching for private lenders willing to fund your deal is not to start a conversation by asking “what are your rates?” This is almost always going to shut the conversation down before it really gets started. Instead, start by building a relationship with

the lender. Rates may vary from below market (if friends or family are lending) to a bit above market (if borrowing from an individual or group of individuals outside your intimate circle.) If you are only looking for the best rates possible, you likely need to be talking to a conventional lender or close family members with spare cash. If you are looking for flexibility, personal service, and a partner highly interested in helping your project succeed, then a private lender may be right for you. Private lenders may be willing to exclude factors that conventional lenders may require, such as credit scores, DTI evaluations, paid appraisals, etc. As such, they may be willing to lend on a deal that a bank may not and can do so relatively quickly if they have available funds, they bring more to the table than just rates.

Private lending can be a great option for real estate investors who need financing quickly, who have credit issues, cash flow challenges, DTI outside of conventional lending requirements, or other challenges that make it difficult to obtain traditional financing, or who are interested in a loan that is customized to their specific needs. However, it is always important to thoroughly vet any potential private lender and to carefully review the terms of the loan before accepting the financing.