Before You Lend Money on Real Estate Deals
In 2025, private lending has become one of the most attractive ways to earn consistent, high-yield returns from real estate—without the hassle of owning property. But before you jump in and loan out your hard-earned cash, there are critical things you need to understand.
This post will walk you through the five essential things you must know before lending money on real estate deals, and how to protect yourself, maximize your returns, and build a real estate lending business that’s both safe and scalable.
Whether you’re a high-net-worth individual, a professional with disposable income, or a retiree looking for passive cash flow, this is your blueprint to lending smart, not just lending fast.
1. Not All Borrowers Are Created Equal
Just because someone is doing a real estate deal doesn’t mean they should be handling your money.
Lending money in real estate isn’t just about evaluating the property—it’s about vetting the operator.
Too many new lenders assume the deal is everything. They ask about the square footage, the neighborhood, and the budget. Those are important—but they aren’t the biggest risk factor. The person you’re trusting to execute the plan is.
What to look for in a borrower:
Experience: Have they completed at least 3–5 real estate projects?
Track Record: Can they show profit statements, before/after photos, or references?
Communication Style: Do they respond promptly, explain clearly, and show transparency?
Financial Skin in the Game: Are they personally investing cash into the project?
Look for signs that they treat real estate investment like a business, not a hustle.
Red flags:
They’ve never done a deal on their own
They dodge detailed questions
They’re vague about timelines or budgets
They ask you to wire funds before documentation
They refuse to show proof of past projects
The difference between a 10% return and a 100% loss is usually the operator.
Take your time. Ask hard questions. Check references. Do background checks. This is your money—treat it accordingly.
2. Your Loan Must Be Legally Secured
Private lending without documentation is gambling. You need legal protection just like a bank would.
This isn’t about being paranoid, it’s about being professional.
Must-Have Documents:
Promissory Note: The written promise to repay your loan. It includes details like principal amount, interest rate, maturity date, and penalties.
Deed of Trust or Mortgage: This secures your loan against the property. If the borrower defaults, you can foreclose and take ownership.
Title Insurance: Protects against unknown claims, liens, or issues with ownership.
Hazard Insurance: If the house burns down, your investment isn’t gone with it.
Personal Guarantee (optional but powerful): Holds the borrower personally liable. This is leverage, especially with LLC borrowers.
Professional Process:
Always close through a title company or a real estate attorney. They’ll ensure:
All docs are correctly executed
Funds are escrowed and released appropriately
Liens are recorded in the county
This structure ensures you’re not just lending money—you’re becoming the bank.
3. Understand Loan-to-Value (LTV) and After-Repair Value (ARV)
Your biggest protection as a lender is how much equity sits under your loan. That’s where LTV and ARV come in.
Definitions:
Loan-to-Value (LTV): The loan amount divided by the current value of the property.
After-Repair Value (ARV): What the property is projected to sell for after renovation.
Most experienced lenders use ARV when evaluating rehab deals.
LTV Guidelines:
Conservative: 65% of ARV
Industry norm: 70% of ARV
Aggressive (for seasoned borrowers only): 75% of ARV
Lower LTV = more equity cushion = less risk.
Why it matters:
If a borrower defaults, and you have to foreclose, your ability to sell the property and recover your funds depends on how much headroom exists between your loan and market value.
Let’s say:
ARV = $300,000
You loan $210,000 (70% of ARV)
Rehab fails, borrower defaults, you take over
Even if you have to fire-sale the property for $250,000, you’re still whole, and possibly ahead.
Never let borrower optimism cloud your LTV math. Base it on comps, not hope.
4. Always Know the Exit Strategy
The borrower’s plan to repay your loan is the foundation of your deal. Don’t just ask “How will I be repaid?”—dig into the mechanics.
Exit Types:
Fix-and-Flip: Property is rehabbed and sold. Payoff comes in the sale.
Buy-and-Hold to Refinance: Property is rehabbed, rented, and refinanced via a bank (BRRRR method).
Resale to a Partner or Portfolio Exit: Property is sold to another investor or fund.
Evaluate the Exit:
Is the ARV based on comps? Get 3 solid comparable properties.
Is the rehab timeline reasonable? Most flips take 4–9 months.
Are contractor bids legit? Ask to see scope and costs.
Is the borrower experienced with this strategy?
What to Avoid:
“We’ll figure it out” exits
Overestimated resale prices
No contingency for budget overruns
Insist on a clear plan, a timeline, and what happens if things go sideways. Your capital depends on their competence.
5. Set Clear Terms—and Enforce Them
Lending without clear terms is like driving without a map. You might get there—but you might also crash and burn.
What to Include:
Loan Amount: Total principal.
Interest Rate: Flat annual percentage (e.g., 10–12%).
Origination Fee: 1–2% upfront fee for funding.
Payment Schedule: Monthly interest? Deferred?
Balloon or Maturity: When is the full amount due?
Default Terms: What happens if they miss a payment?
Extension Option: What if the flip takes longer than expected?
Put these terms in the promissory note and have them initialed.
Bonus Terms:
Require monthly updates (photos, progress reports)
Ask for quarterly or mid-project walkthroughs
Charge a daily penalty for overdue maturity
You’re not being harsh. You’re being clear. And clarity protects both sides.
BONUS: Case Study — David’s First Lending Deal
David, a 48-year-old tech professional, had $150,000 sitting in a money market account earning under 1%. He was tired of volatility and inflation, eating away at his savings.
He found a local investor doing high-volume flips and loaned $100,000:
Purchase Price: $180,000
ARV: $310,000
Rehab: $45,000 budget
Term: 9 months, interest-only payments
Interest: 10%, paid monthly
Documents: Promissory note + recorded deed of trust
David earned $7,500 over 8 months and reinvested with the same borrower on a second deal. Now he rotates capital across 3–4 deals per year and consistently earns $9,000–$12,000 annually from private lending—with no tenants, no maintenance, no 2 a.m. calls.
Lesson: Capital + structure + discipline = cash flow.
Protect the Principal, Then Grow It
Private lending isn’t a guessing game. It’s a disciplined investment vehicle that can outperform traditional real estate—when done correctly.
If you remember nothing else, remember this:
Vet people harder than properties
Get everything in writing
Don’t over- loan
Know the exit before you enter
Act like a bank, not a buddy
Done right, lending is one of the safest ways to grow wealth passively. Whether you’re lending $50,000 or $500,000, the principles remain the same.
Set the terms. Enforce them. Sleep well at night.
This is the end of this mini- series on educating the public about lending or private lending. I hope you enjoyed reading it as much as I did writing it.
If you missed the previous posts about this series, find all of them here: The series
Clicking this link brings you to the first post and you can read the rest of them from there.