Private money is an individual lending their own capital on a deal, secured against the property. It is usually cheaper than hard money, considerably more flexible, and it depends entirely on a relationship that takes time to build.
It is also where investors most often get the paperwork wrong, because the informality that makes it pleasant makes it tempting to skip steps.
Background only, not legal or investment advice. Lending, usury and securities rules vary by state. Structure any arrangement with a qualified attorney rather than a template.
How It Differs From Hard Money
It is one of the options mapped in funding a real estate deal, and the one that takes longest to arrange and costs least once it exists.
Both are asset-based and short-term. The differences are practical.
A hard money lender is a business with a process, published terms and an underwriting department. They fund quickly, they charge accordingly, and the relationship is transactional, per hard money lending explained.
A private lender is a person. Terms are negotiated rather than published, pricing is usually better, and decisions depend on whether they trust you rather than on a scorecard.
The trade is speed and reliability. A hard money lender who approves will fund. A private lender may have a family situation, a change of mind, or money committed elsewhere, and a deal built entirely on one individual has a single point of failure.
Who Actually Lends
People with capital that is not working hard, which is a larger group than investors expect.
Retirees with savings earning very little. Professionals with income and no time to invest actively. People who sold a business or a property. Other investors between deals. Family members with means, which carries its own complications.
Self-directed retirement accounts are a common source, and they carry specific rules including prohibitions on transactions with certain related parties. That is an area where getting it wrong has tax consequences for the lender rather than for you, which makes it worth knowing about rather than assuming.
What all of them share is wanting a return better than a deposit account with security they can understand. A loan against real property, at a conservative loan-to-value, is a proposition that makes sense to someone who is not a professional investor.
What They Are Actually Evaluating
Not the same things a hard money lender checks.
Whether you are careful. Whether you have done this before and what happened. Whether you explain risk unprompted. Whether their position is genuinely secured and what happens if the deal fails.
That last one is the conversation investors avoid and the one that decides it. Raising the failure case yourself, unprompted, is what converts a cautious person into a lender, because it tells them you have already priced the thing they were about to worry about, detailed in buyer and lender sequences.
The practical implication: lead with security and process rather than with the rate. Someone deciding whether to lend a substantial sum to an individual is managing fear rather than optimizing yield.
The Paperwork That Has to Exist
The part informality erodes, and every element protects both sides.
A promissory note. The document creating the obligation to repay. Amount, rate, term, payment schedule, what happens on default.
Security recorded against the property. A mortgage or deed of trust depending on your state, recorded publicly. This is what makes the loan secured rather than a personal loan with a story attached, and an unrecorded interest is worth far less than the lender assumes.
Lender's title insurance. Protecting their position against title defects.
Hazard insurance naming them. So that a fire does not eliminate their security.
Every one of these is standard, and a private lender who does not ask for them is a lender who does not know what they are doing, which is a reason to be more careful rather than less. The details are in structuring a private loan.
Terms That Are Actually Negotiable
Private lending is negotiated rather than published, which means several things are on the table that a hard money lender would not move on.
Whether interest is paid monthly or accrues to the end. Accrued interest preserves your cash during the project and costs more in total. For a renovation with no income, that trade is frequently worth making.
Whether there are points. Many private lenders charge none, which is a large part of why private money is cheaper.
The term, and what an extension costs. Negotiate a longer term than you need rather than relying on an extension you have not priced.
Whether there is a prepayment penalty. Usually not with private money, and worth confirming.
Whether renovation funds are advanced or reimbursed. Reimbursement means you fund the work first, which is a cash requirement investors miss until it arrives.
Whether you personally guarantee it. The single most consequential term, since it determines whether a failed deal is contained or personal, covered in structuring a private loan.
The Securities Question
Where investors get into genuine trouble without intending to.
A straightforward loan from one person, secured by a specific property, with defined terms, is generally a loan. Once you begin pooling money from several people, offering returns from a fund rather than a specific asset, or advertising for investors generally, the analysis changes and securities regulation can apply.
The consequences of getting that wrong are serious and personal, and the test does not turn on what you called the arrangement.
The line is genuinely blurry in the middle, which is exactly why it needs counsel before the arrangement rather than after. The detail sits in raising private capital and securities law.
How to Actually Find Them
Slowly, and mostly not through marketing.
Local investor associations, where people with capital and no time are looking for exactly this. Existing professional relationships, meaning your accountant, attorney and title company, who know people with money. Past sellers, occasionally, who now hold proceeds. Other investors, who know lenders they cannot currently use.
What works less well is advertising for lenders generally, which is both less effective and the behavior most likely to raise the securities question.
The approach that works is being visible as someone who does this competently, and letting the conversations arise. That is the same reputational asset described in investor positioning, applied to the capital side.
The First Loan With a New Lender
Make it small and make it boring.
A modest amount on a straightforward deal with a comfortable margin, repaid exactly on schedule, is worth more than a large first loan on a complicated project. It converts an untested relationship into a proven one at low stakes.
Communicate more than necessary during it. A short update every few weeks, including when nothing has changed, does more for the relationship than the return does. Silence during a project is what makes an inexperienced lender anxious, and anxious lenders do not lend again.
Repay on time even where it costs you something. The reputation for repaying exactly as agreed is what makes the second, larger loan possible.
What to Do When a Deal Goes Wrong
It will eventually, and this is where relationships are made or ended.
Tell them early rather than at maturity. A lender informed in month two that the timeline is slipping has options and feels respected. One who finds out at the payment date does not.
Be specific about what happened and what you propose. An extension with additional interest, a partial repayment, a revised schedule. Bring a proposal rather than a problem.
And protect their position ahead of your own outcome. An investor who takes a loss to repay a lender in full is an investor that lender works with permanently, and that is usually the better trade even when it is painful.
Family Money, Specifically
The most common first private loan and the one with the most ways to go wrong.
The advantages are real: trust exists already, terms are usually favorable, and the conversation is easier to start.
The risk is that the relationship absorbs the consequences of a bad deal, and it does not absorb them well. A stranger who loses money on your project is a business problem. A parent who loses money is a permanent family situation.
Which argues for treating it more formally rather than less. The same promissory note, the same recorded security, the same insurance, the same written terms. Informality feels respectful and it is what produces the disputes, because nobody agreed in advance what happens if the project takes two years.
Two additional cautions. Borrow only what the person can genuinely afford to lose, regardless of what they offer, since their assessment of that is distorted by wanting to help you. And be more conservative on the deal itself than you would be with institutional money, because the downside is not financial.
The Thing to Do This Month
If you have no private lender relationships, start one conversation.
Not a pitch. A conversation with someone in your existing network about what you do and how private lending on your deals would work, with no specific deal attached.
Those conversations take months to mature, which is precisely why they have to start before you need the money. An investor with three warm lender relationships can move on a deal that an investor with none cannot, and the difference was six months of unhurried conversations.