Private Money Loans

Private money is capital borrowed directly from individuals—friends, family, colleagues, or investor networks—typically documented with a promissory note and secured by a real estate lien. The terms are negotiated between you and the lender. Private money is flexible and fast, but it requires relationship trust and careful documentation to avoid family conflict or legal disaster.

Key takeaways

• Private money rates range from 0% (family gifts) to 12%+ (institutional private investors)
• Loans are documented with promissory notes and recorded as liens on the property
• Private lenders are motivated by return, safety, or relationship, not by your credit score
• Private lending is fast and flexible but requires excellent documentation and clear expectations
• Using private money improperly (no note, no lien, handshake deals) creates legal and tax risk

Where private money comes from

Private money sources fall into three categories:

Family and friends: A parent, sibling, or close friend who lends money at low or zero interest to help you build wealth. Examples:

• Parent lends $100,000 at 2% annually to help you buy rental property
• Wealthy uncle provides $200,000 interest-free to fund a down payment
• Sibling lends $50,000 at 4% to buy a house and flip it

Informal investor networks: Real estate meetups, investor clubs, and informal syndicates where members lend to each other. Examples:

• Your real estate investing club has $2 million in pooled capital; members borrow from the pool at 7–9%
• An angel investor in your city provides capital to promising investors at 10% annually
• A construction company finances property purchases for their contractor friends at 8%

Institutional private money: Lenders who are not traditional banks but operate as mortgage companies or funds. Examples:

• A private lending fund specializes in fix-and-flip financing (similar to hard money)
• A real estate syndication offers passthrough preferred equity at 10–12% returns
• A REIT or mortgage company funds non-conforming loans at 9–11%

Private money exists because traditional banks say "no" to borrowers or properties the private lender accepts. The tradeoff is flexibility in exchange for higher rates or shorter terms.

Interest rates and terms

Private money rates vary radically:

Source	Typical Rate	Terms	Risk
Family/friend (gift)	0%	Open-ended	Relationship risk
Family/friend (loan)	2–4%	5–10 years	Low interest, slow payback
Informal investor network	6–10%	1–5 years	Moderate, relationship-based
Private mortgage fund	8–14%	1–3 years	Higher, business relationship
Angel/syndicate investor	9–12%	3–7 years	Shared equity or return priority

A family member lending at 2% is hoping you succeed and building family wealth. An institutional private lender at 12% is seeking high returns and expecting monthly payments, often backed by a detailed promissory note and financial reporting.

The critical variable is what motivates the lender: family closeness (low rate, flexible terms), return-seeking (market rate or higher, professional documentation), or relationship (somewhere between).

Documentation: The promissory note

Any private money loan beyond a casual family gift should be documented with a promissory note—a written agreement specifying:

• Principal amount: $100,000
• Interest rate: 6% annually
• Term: 5 years
• Payment schedule: Monthly payments of $1,933 due on the 1st of each month
• Balloon or payoff: Loan due in full on [date]
• Default provisions: What happens if you miss a payment
• Lien or security: The property is held as collateral

The note should be signed by both parties, dated, and witnessed. For family loans, a simpler one-page promissory note is acceptable. For institutional private loans, expect 10–20 pages of terms and conditions.

The note should also specify whether the loan is recourse (the lender can pursue your personal assets if you default) or non-recourse (the lender's only remedy is the property). Non-recourse loans are more protective of the borrower but cost more (higher rate) because the lender has less recourse.

Recording a lien

Most private loans are secured, meaning the lender has a lien on the property. If you default, the lender can foreclose and sell the property to recover their capital. Securing the loan:

• Protects the lender (they have priority over unsecured creditors)
• Lowers the interest rate (secured loans are less risky than unsecured)
• Provides legal documentation that the loan is real, useful if the lender ever needs to enforce it

A lien is recorded with the county or state where the property is located. The lender's mortgage or deed of trust is filed, creating a public record of the debt. This costs $200–500 in legal and recording fees but is essential for anything other than family gifts.

An unsecured private loan (no lien) is riskier for the lender and should only be used for family members who trust you deeply. Unsecured loans are also treated differently by the IRS (more below).

Private money vs hard money

The line between private money and hard money is blurry, but the distinction matters:

Factor	Private Money	Hard Money
Lender type	Individual or small firm	Institutional fund/firm
Motivation	Return, relationship, or both	Return (profit-maximizing)
Rate	0–12%	10–18%
Terms	Flexible, negotiated	Standardized, less flexible
Underwriting	Borrower-focused (relationship) or property-focused (return-seeking)	Property-focused (ARV)
Documentation	Simple note or complex agreement	Detailed loan documents
Speed	Days to weeks	3–7 days
Professional servicing	Rare	Standard

In practice, a hard money firm is a type of private money lender—they use private capital or investor funds to make loans. But "hard money" usually refers to the institutional, high-rate, property-focused lender, while "private money" refers to relationship-based or less standardized lending.

Tax and legal considerations

Private money lending triggers tax and legal issues that conventional mortgages don't:

Imputed interest: If you borrow $100,000 from a family member at 0% or below-market interest, the IRS imputes interest based on the IRS mid-term rate (approximately 5% in 2026). Even if you pay 0% interest, the IRS treats the loan as if you paid 5% to the lender and received a $5,000 annual gift. This triggers gift tax reporting on your lender's taxes.

To avoid imputed interest, family loans must charge at least the IRS mid-term rate (updated monthly). A 3% family loan triggers imputed interest; a 5% loan does not.

Personal guarantee: If the loan is non-recourse (secured by the property only), there is no personal guarantee. If it is recourse (can pursue your personal assets), you've signed a personal guarantee, exposing non-real-estate assets if you default.

Loan vs gift distinction: If the loan is truly a gift with no expectation of repayment, the lender should report it as a gift (gift tax return), and you should not record a promissory note. Falsely claiming it's a loan when it's a gift creates tax liability for the lender.

Accredited investor rules: If the lender is an investor you've solicited for capital, or if you're operating as a quasi-fund, you may need to register as a securities offering. This is a complex regulatory question for investors gathering capital from multiple lenders.

For simple family loans under $100,000, these rules are relaxed in practice. For larger loans or investor networks, consult a real estate attorney and accountant to ensure compliance.

Typical private money scenarios

Scenario 1: Family down payment assistance

Your parent lends you $100,000 at 3% annually to fund a down payment on a $400,000 rental property. You secure the loan with a second lien (the property is your primary collateral for your conventional mortgage).

• Terms: 10-year amortization, monthly payments $966
• Note: Simple one-page promissory note, witnessed by both parties
• Lien: Second mortgage recorded with the county
• Outcome: You complete the rental purchase with family support, pay your parent back slowly as you earn rental cash flow

Scenario 2: Fix-and-flip with investor partner

You partner with an angel investor who provides $100,000 for a $200,000 purchase and $40,000 renovation. You provide $60,000 of your own capital.

• Terms: Investor receives 40% of profit (investor contributed $100,000 of $200,000 total capital)
• Note: 10-page LLC operating agreement with detailed profit-sharing and exit terms
• Lien: First mortgage recorded; investor has priority claim
• Timeline: 12-month project; you split profit (suppose $80,000 profit total, investor gets $32,000, you get $48,000)

Scenario 3: Rapid scaling with investor pool

You join a real estate investment syndicate where 10 members pool $500,000. The syndicate lends to members at 8% annually to finance acquisitions.

• Terms: Members borrow up to their contributed amount at 8%, 5-year amortization
• Note: Detailed syndicate agreement with internal loan tracking
• Lien: Each member's property serves as collateral
• Outcome: Rapid access to capital for members with a track record, but with syndicate oversight

Relationship maintenance with private lenders

The biggest risk of private money is relationship failure. You borrow $100,000 from your brother-in-law at 5%, planning to return it in 5 years. Then:

• The property sits empty for 6 months (tenant moves, new tenant delay)
• You miss a payment
• Your brother-in-law feels betrayed and demands full repayment
• You can't pay early, he escalates to legal action
• The relationship breaks and may affect wider family

To prevent this:

• Make payments on time, even if it stretches you financially. Missed payments destroy trust.
• Communicate proactively if you see trouble ahead. Call your lender before the missed payment and explain your plan.
• Over-document: A simple handshake deal is a disaster waiting to happen. Use a written note, record the lien, and share annual financial statements.
• Keep money and family separate when possible. Borrow from investors, not family. If you must borrow from family, make it a formal, documented loan with a dispassionate repayment schedule.

When private money is appropriate

Private money works when:

• You have a clear project with known cash flow (rental with documented rent) or exit (flip with ARV estimate)
• You have existing relationships with lenders who know and trust you
• You cannot qualify for conventional financing due to credit, income, or property type
• The rate is attractive (under 8% for long-term holds, under 12% for shorter projects)
• You can document the loan professionally to protect both parties

Private money is inappropriate when:

• You're borrowing to cover living expenses or debt service on other properties
• The lender is a stranger you've met once
• You have no documented plan to repay
• You're hiding the loan from your spouse or co-borrowers

The syndication path

As you scale, you may move from one-off private money loans to structured syndications: offerings where multiple investors contribute capital to a fund or deal in exchange for preferred returns (say, 10–12% annually) and profit-sharing.

Syndications are more regulated (securities offerings) but also more efficient at scale. Instead of borrowing $50,000 from each of 10 friends, you structure a $500,000 syndicate, offer 10% preferred returns, and use the capital to acquire and manage multiple properties. This professionalization reduces relationship risk.

Flowchart

Related concepts

• Hard Money Loans
• Seller Financing
• Portfolio Loans

Next

Private money comes from individuals; seller financing is a special case where the individual is the person selling you the property. Instead of borrowing from a separate lender, the seller extends credit directly. The next article explores how seller financing works and when it's a more attractive option than traditional lending.