How to become a private money lender

Step 1: Define your goals and limits

Decide how much you'll lend, for how long, and how many loans you need to diversify. A single $200,000 loan is concentrated risk; four $50,000 loans across different borrowers and markets are not. Decide your target net yield after servicing costs and a loss allowance. Our note yield calculator helps.

Step 2: Understand the legal basics

• Business-purpose only. Most individual private lenders stick to loans for investment property owned by an entity. Loans on owner-occupied homes trigger consumer lending laws and often licensing requirements.
• Licensing. Some states require a lender license even for occasional or business-purpose loans; others exempt them. Check your state and the property's state.
• Usury. States cap interest rates differently, with various exemptions. Default rates and fees count too.
• Securities. Pooling money from others, or offering profit shares, may create a security. That requires an attorney.

Step 3: Find borrowers

Most private lenders start with investors they know: local real estate investment groups, agents and contractors, title companies, or experienced flippers outgrowing their current capital. Platforms and brokers can also introduce borrowers. Look for a track record you can verify: addresses, purchase and sale records, and references from other lenders.

Step 4: Underwrite the deal

The property

• Independent valuation: an appraisal or BPO ordered by you, not the borrower.
• Your own comps, both as-is and after repair.
• Conservative leverage: many private lenders cap loans around 65–75% of ARV, lower for riskier assets.
• A realistic scope of work and budget, and a site visit if possible.

The borrower

• Experience and verified track record
• Credit report and background check (with written authorization)
• Liquidity to cover the down payment, interest and overruns
• Entity documents and personal guarantees

The exit

How will you be repaid: a sale, a DSCR refinance, or something else? What happens if the market drops 10%? Lend at a level where you'd be comfortable owning the property at your loan balance.

Step 5: Document the loan

• Promissory note: amount, rate, payments, maturity, default rate and fees.
• Mortgage or deed of trust: recorded to secure your lien. Insist on first position.
• Personal guarantee from the borrower's principals.
• Loan agreement covering draws, reporting and covenants (for rehab loans).
• Lender's title insurance policy naming you as insured.
• Hazard insurance naming you as mortgagee or loss payee; builder's risk for construction.
• Assignment of rents and leases (for rentals), plus UCC filings where appropriate.

Step 6: Close through a professional

Close only through a licensed title company, escrow agent or closing attorney. Wire funds to verified escrow instructions, confirmed by phone using a number you looked up independently. Wire fraud is one of the most common ways lenders lose money.

Step 7: Service the loan

Collect payments, track insurance and taxes, inspect draws, and send required notices. Many private lenders use a licensed third-party servicer for a small monthly fee. It creates a clean payment record and keeps you compliant.

Step 8: Plan for default

Before funding, know your state's foreclosure process (judicial or non-judicial), the typical timeline and cost, and your alternatives: loan modification, deed-in-lieu or a negotiated sale. Keep cash reserves to protect the collateral (insurance, taxes, emergency repairs) during a workout.

Taxes and retirement accounts

Interest income is generally taxed as ordinary income. Some lenders use a self-directed IRA to lend, which can defer or eliminate tax on interest, but IRS prohibited-transaction rules forbid lending to yourself or certain family members. Consult a tax professional.