Private Money
Lending

Private money vs. hard money

Both are asset-based real estate loans from non-bank lenders. The difference is the lender: hard money originates from professional lending businesses (funds, institutional lenders, fix-flip specialists), while private money originates from individuals or relationship networks.

Private money is typically cheaper (6–12% vs. 9–15% for hard money), often has lower or no points, and carries more flexible terms — because the relationship matters and the lender has specific personal knowledge of the borrower’s capacity.

The trade-off is scale. Hard money lenders have essentially unlimited capital; private money lenders each have capacity limits. Raising large project capital from private money requires assembling multiple lenders, which triggers securities law.

Typical structures

• First-position loan — senior lien on the property; 6–8% interest typical; 70% LTV or ARV-LTV cap. Lowest risk, lowest rate.
• Second-position loan — junior lien; 9–12% interest typical. Used for gap financing when the first-position lender caps below total project need. Higher risk, higher rate.
• Joint venture / equity partnership — lender takes ownership stake (20–50%) plus profit share rather than fixed interest. Common structure: 8% preferred return to the JV partner, then 70/30 split of profits above preferred. Suited for longer-hold deals and developments.

Funds (pooled multi-investor capital) vs. deal-specific loans: funds scale but increase fiduciary and SEC compliance burden; deal-specific suits single-deal financings and first-time raises.

Securities law — the defining constraint

When an investor raises money from others with the expectation of a return generated by the investor’s work, the transaction is almost always a security under the Howey test. Securities must either be registered with the SEC (expensive, rare) or fit within an exemption.

The primary exemption for private real estate deals is Regulation D:

• Rule 506(b) — unlimited accredited investors plus up to 35 non-accredited (sophisticated) investors. No general solicitation allowed. This means no public advertising, no open webinars, no social media campaigns promoting the deal. You can only raise from people with whom you have a pre-existing substantive relationship.
• Rule 506(c) — unlimited accredited investors only. General solicitation permitted — but you must take “reasonable steps to verify” accredited status (third-party letter, tax returns, W-2s, brokerage statements). No self-certification.

Accredited investor definition (17 CFR §230.501): individual income > $200,000 for two years ($300,000 joint) with reasonable expectation of continuing, OR net worth > $1,000,000 excluding primary residence. Certain licensed professionals (Series 7, 65, 82) and knowledgeable fund employees also qualify.

Form D must be filed with the SEC within 15 days of the first sale. Each state where an investor resides requires its own “blue sky” notice filing ($100–500 fees). Non-compliance with blue sky is a frequent overlooked violation.

Violations are serious. The SEC can order rescission (repaying every investor their principal plus interest), impose civil penalties, and refer for criminal prosecution. The rescission right also accrues to investors — an investor who loses money in a non-compliant offering can sue for full principal plus interest, and win.

Documentation essentials

• Promissory note — binding repayment terms: principal, rate, term, payment schedule, default triggers, acceleration, prepayment, default interest rate, attorney-fee provisions, governing law.
• Deed of trust or mortgage — security instrument recorded against the property. Include an assignment of rents clause for income properties.
• Private Placement Memorandum (PPM) — for any multi-investor raise, this disclosure document describes risk factors, use of proceeds, manager background, financial projections, and conflicts of interest. Professionally drafted PPMs run $8,000–$20,000; they’re the single best defense against later investor lawsuits.
• Subscription agreement — investor’s representations about accredited status, sophistication, and receipt of disclosure documents.
• Operating agreement (for JV/fund structures) — governance rules for partnerships and LLCs, including distribution waterfall, decision-making authority, transfer restrictions.

Self-Directed IRAs as private money source

SDIRA holders collectively hold hundreds of billions of retirement assets seeking yield. They can lend to a real estate investor’s deal via SDIRA-to-investor promissory notes, earning the interest tax-deferred (or tax-free in a Roth SDIRA). Custodians (Equity Trust, Entrust, Quest, Directed IRA) process the mechanics.

Prohibited transactions (IRC §4975) — the SDIRA cannot transact with “disqualified persons” including the account holder, their spouse, ancestors, descendants, and entities 50%+ owned by those people. A borrower who is the lender’s son or business partner creates an immediate prohibited transaction that disqualifies the entire IRA — it’s deemed distributed and taxable in the year of violation.

See the self-directed IRA reference for the full framework on the IRA side.

Joint ventures vs. loan structures

JVs suit aligned long-term partners who can stomach upside/downside together. Loans suit arm’s-length lenders who want fixed yield and defined recourse.

Building the private money list

• Real Estate Investor Associations (REIAs) — monthly local meetups where active investors and lenders cross paths
• Professional referrals — CPAs, estate planning attorneys, and wealth advisors know accredited clients seeking yield
• LinkedIn (high-net-worth alumni, doctor/dentist networks, entrepreneurial groups)
• Existing private lenders — satisfied lenders refer friends; every deal completed should close with the ask “who else might be interested?”
• Closed-deal case studies — present deal breakdowns at local meetups, showing 10–15% IRR and the thesis behind the deal. Education converts to capital.

Nurture is the long game. Quarterly deal-update emails to all prospects (SEC-permissible for existing relationships), transparent reporting on closed deals, and consistent post-deal checks for additional capital build a reliable capital stack over 2–5 years.

Common pitfalls

• General solicitation under 506(b). Posting a deal on Facebook, discussing it on a public podcast, or advertising on Bigger Pockets without established relationships triggers general solicitation and invalidates the 506(b) exemption. Rescission follows.
• No verification under 506(c). Accepting self-certification of accredited status in a 506(c) offering violates the verification requirement. Always get an attorney or CPA letter, or use a verification service (VerifyInvestor).
• Skipping Form D. Failure to file within 15 days can disqualify the exemption in subsequent offerings. File Form D even for single-investor raises.
• Ignoring blue sky laws. Each investor’s state has its own notice filing requirements. Fines add up, and state regulators occasionally initiate enforcement.
• Commingling funds. Mixing investor capital with personal or operating accounts is a fiduciary breach and SEC red flag. Use segregated bank accounts and third-party servicers.
• Weak disclosures. Failing to disclose material risks (market downturn, construction delay, environmental) in written form creates fraud exposure. A professionally drafted PPM costs $8,000–$20,000 and pays for itself on the first enforcement-free offering.
• SDIRA prohibited transactions. Borrowing from a family member’s SDIRA, or lending from your own SDIRA to your deal, is a prohibited transaction that destroys the IRA. Only arm’s-length unrelated-party SDIRA loans work.
• Relationship damage on default. Family and friends who lose money to your deal never forget. Don’t take unsuitable capital even if offered. Accept only what the investor can afford to lose entirely.