Private Lending & Hard Money 101

Private lending (also called hard money lending) is asset-based financing for real estate investors. Unlike traditional bank lending, which focuses on the borrower's income and creditworthiness, private lending focuses primarily on the deal itself — the property's value, the investment strategy, and the borrower's ability to execute.

The term "hard money" comes from "hard asset" — the loan is secured by the physical real estate. The property is the collateral. If the borrower defaults, the lender can foreclose on the property and recover their capital. This asset-based security model allows private lenders to move faster, approve borrowers that banks would decline, and fund property types that banks avoid (distressed, non-habitable, commercial mixed-use).

Private lending serves a critical role in the real estate investment ecosystem. Without it, most fix and flip deals would be impossible — banks do not lend on distressed properties. Bridge financing, construction lending, and quick-close acquisitions all depend on private capital.

The industry has evolved significantly. What was once a fragmented market of individual wealthy investors making loans from their personal funds has become a professionalized industry with institutional capital, standardized underwriting, and technology-driven platforms like AIRE Lending that can pre-qualify borrowers in 60 seconds and close loans in 7-14 days.

The differences between private lending and conventional (bank) lending go far beyond interest rates. Understanding these differences helps you choose the right financing tool for each deal.

Speed: Private lenders close in 7-14 days. Banks close in 30-60 days. This speed difference is often the deciding factor in competitive markets. When a wholesaler or motivated seller wants to close in 10 days, a bank loan is not an option. Private lending is.

Qualification: Banks underwrite the borrower — they want to see 2 years of tax returns, W-2s, bank statements, a strong DTI ratio, and a high credit score. Private lenders underwrite the deal — they want to see the property value, the ARV, the rehab budget, and the borrower's ability to execute the business plan. Credit scores matter (most require 620+), but personal income verification is typically not required.

Property Condition: Banks require the property to be habitable and in good condition. They will not lend on a house with a leaking roof, missing kitchen, or code violations. Private lenders specifically finance these types of properties — that is the entire point of fix and flip lending.

Loan Term: Bank mortgages are 15 or 30 years with amortizing payments. Private loans are 6-24 months with interest-only payments. Private loans are designed for short-term strategies (flip, bridge, construction). For long-term holds, investors typically use a private loan for the acquisition and renovation, then refinance into a conventional or DSCR loan.

Entity Lending: Most private lenders happily lend to LLCs, corporations, and trusts. This allows investors to hold properties in entities for liability protection. Many banks require the borrower's personal name on title, especially for residential properties.

Cost: Private lending is more expensive on an annualized basis — rates of 9-13% versus 6-8% for conventional. But for short-term deals, the total cost is often comparable. A flip loan at 11% held for 5 months costs less in total interest than you might think, and the ability to close faster often means you get the deal in the first place.

Private lending has its own vocabulary. Here are the key terms you need to understand before applying for a loan.

LTV (Loan-to-Value): The loan amount as a percentage of the property's current value (purchase price or appraised value). If you are buying a property for $200,000 and the lender offers 85% LTV, they will lend $170,000 — you bring $30,000 as your down payment. Most private lenders cap LTV at 80-90%.

LTC (Loan-to-Cost): The loan amount as a percentage of the total project cost (purchase price + rehab budget). If your total project cost is $250,000 (200K purchase + 50K rehab) and the lender offers 90% LTC, they will lend $225,000 total — you bring $25,000 total out of pocket. LTC is particularly relevant for fix and flip loans where the lender finances both purchase and renovation.

ARV (After-Repair Value): The estimated market value of the property after renovation is complete. ARV is the most important number in a flip deal — it determines your profit margin and the maximum the lender will finance. Most private lenders cap total financing at 70-75% of ARV, regardless of the LTV or LTC. This ARV cap is the lender's safety net — even if you default, the property is worth significantly more than the loan balance.

Points (Origination Fee): Upfront fee charged at closing, expressed as a percentage of the loan amount. "2 points" on a $200,000 loan = $4,000 due at closing. Points typically range from 1 to 3 depending on the lender, program, and borrower profile. Points are the lender's primary revenue and are non-negotiable at most firms, though experienced borrowers with repeat business may negotiate lower points.

Interest-Only Payments: Most private loans require monthly interest-only payments with no principal amortization. On a $200,000 loan at 11% interest, your monthly payment is $1,833 ($200,000 x 11% / 12). The full principal is repaid when you sell or refinance the property.

Prepayment Penalty: Some private loans include a penalty for paying off the loan early (before a minimum term). Others have no prepayment penalty. Always ask. For flip loans, you want no prepayment penalty since your goal is to sell as quickly as possible.

Extension Fee: If your project takes longer than the original loan term, you may be able to extend for an additional fee — typically 1 point for a 3-6 month extension. Build this possibility into your budgeting in case the project runs long.

The right financing tool depends on your strategy, timeline, and the specific deal. Here is a practical decision framework.

Use Private Lending When:

You need speed. If you are buying at auction, from a wholesaler, or in a competitive multiple-offer situation, the ability to close in 7-14 days is a competitive advantage that can win you the deal. Sellers and their agents prefer cash or cash-equivalent (fast-close private lending) over bank-financed offers that take 45+ days.

You are buying a distressed property. If the property needs significant renovation, is not habitable, has code violations, or will not appraise in its current condition, a bank will not lend on it. Private lending is specifically designed for these properties.

You are doing a short-term deal. Fix and flip, bridge (holding temporarily while transitioning between strategies), or construction projects are inherently short-term. A 12-month interest-only loan is the right tool for a 6-month flip. Paying for a 30-year amortizing mortgage when you plan to sell in 6 months is inefficient.

You cannot qualify conventionally. Self-employed with complicated tax returns, already at 10 financed property limit with conventional, high DTI ratio, or foreign national — private lending solves all of these qualification barriers.

Use Conventional or DSCR Lending When:

You are buying a stabilized property for long-term hold. A turnkey rental in good condition that you plan to hold for 10+ years should be financed with a 30-year loan at the lowest available rate. The monthly payment will be lower, your cash flow will be better, and the total interest over the life of the loan will be significantly less.

Speed is not critical. If you have 30-45 days to close and the property qualifies for conventional financing, the lower rate saves you money.

The Hybrid Approach: Many sophisticated investors use both: private lending for acquisition and renovation, then refinance into a DSCR or conventional loan for the long-term hold. This is the BRRRR strategy — and it optimally uses each financing tool for what it does best.

Pre-qualification is the first step in the lending process. It gives you an estimated term sheet — showing your projected rate, leverage, loan amount, and fees — before you commit to a full application.

Traditional Pre-Qualification (Most Lenders): Fill out a multi-page application. Submit financial documents. Wait 2-5 business days for a response. Schedule a phone call to discuss. This process is slow and discourages investors from shopping multiple lenders.

AIRE Lending Pre-Qualification: Answer 8-10 questions about your deal (property state, loan purpose, property type, purchase price, rehab budget, ARV, credit score range, experience level, contact info). Receive your term sheet estimate in seconds. No documents required. No credit pull. No phone call needed (unless you want one). The entire process takes 60 seconds.

Pre-qualification is not a loan commitment. It is an estimate based on the information you provide. Final terms are determined during full underwriting after you submit a complete application, the property is appraised, and your background is verified. However, a pre-qualification from a reputable lender is a strong indicator of what you will actually receive — the final terms should be close to the pre-qualification estimate if the information you provided is accurate.

Why Pre-Qualification Matters for Deal Analysis: When you are analyzing a potential deal, you need to know your financing costs to determine profitability. Pre-qualifying before you make an offer lets you model the deal with real numbers — actual projected rate, actual origination points, actual loan amount — instead of guesswork. This makes your analysis more accurate and your offers more confident.

The private lending industry includes many reputable firms and some that take advantage of borrowers. Here are red flags that should prompt further investigation or cause you to walk away.

Upfront fees before approval. Legitimate lenders do not charge application fees, processing fees, or "commitment deposits" before issuing a term sheet or loan approval. If a lender asks for money before you have a signed commitment letter, proceed with extreme caution.

Rates or terms that sound too good to be true. If a lender advertises rates dramatically below market (say, 6% for a fix and flip loan when the market is 9-12%), the real cost is likely hidden in points, fees, or terms that are not disclosed upfront. Always ask for the total cost of the loan — rate, points, fees, closing costs — and compare apples to apples.

No physical office or verifiable track record. Research the company. Check for reviews on Google, BiggerPockets, and Trustpilot. Verify they are a registered business. Look for closed deal examples or references from real borrowers. An established lender should have a verifiable presence and history.

Pressure to close quickly without due diligence. A lender who pushes you to sign documents without giving you time to review, who discourages you from having an attorney review the loan documents, or who pressures you to waive contingencies is not acting in your best interest.

Junk fees at closing. Review the closing disclosure carefully. Legitimate fees include origination points, appraisal fees, title insurance, escrow fees, and recording fees. "Administrative fees," "technology fees," "broker fees" (if you did not use a broker), or vaguely named charges should be questioned.

No clear draw process for rehab funds. For fix and flip loans, the lender should clearly explain how rehab draws work — how many draws, what triggers a draw, what documentation is needed, and how long it takes to receive funds after a draw request. Vague or overly restrictive draw processes can leave you stranded mid-renovation with no access to your rehab budget.

Working with established, technology-driven lenders like AIRE Lending reduces these risks. Our terms are presented upfront during pre-qualification, our fee structure is transparent, and our process is standardized and documented.