Private Lending in Real Estate: How to Become the Bank

Private lending is the act of an individual or small entity lending money for real estate and earning interest secured by the property. Whether you originate a new loan or buy an existing note, the idea is the same: you become the bank.

Two ways to be a private lender

• Originate a loan — you fund a borrower (often a real estate investor doing a fix-and-flip or rental) and create a brand-new promissory note secured by the property.
• Buy an existing note — you purchase a note already in place, usually at a discount, and step in as the lender. Less origination work; you inherit a track record.

How private lending makes money

• Interest income — private loans typically carry higher rates than bank loans, compensating you for flexibility and risk.
• Points & fees — origination points are common when you make the loan.
• Discount — when you buy an existing note below its balance, the discount boosts your effective yield.

Private money vs. hard money

The terms overlap. “Hard money” usually refers to professional, short-term lenders funding investor projects at higher rates and points. “Private money” is broader — any non-institutional lender, including individuals lending from savings or a self-directed retirement account. Both are secured by real estate; the difference is who’s lending and on what terms.

Securing your money: the documents

Never lend on a handshake. A properly secured private loan has the same backbone as any real estate note:

• A promissory note setting the amount, rate, and terms.
• A recorded mortgage or deed of trust placing your lien on the property.
• Lender’s title insurance and your name on the hazard insurance as mortgagee.
• A conservative loan-to-value so there’s an equity cushion if you have to foreclose.

The risks to respect

• Borrower default — your recourse is the collateral, so the property value and your lien position must be solid.
• Over-valued collateral — independently verify value; don’t take the borrower’s word.
• Foreclosure cost & time — varies by state (judicial vs. non-judicial).
• Liquidity — your capital is tied up until payoff (or until you sell the note).

How to start

1. Decide originate vs. buy existing — buying notes is the lower-effort on-ramp.
2. Set a buy box: states, lien position, max LTV, and minimum return.
3. Line up the documents and a servicer; never skip title and insurance.
4. Run full due diligence on the borrower, collateral, and title.

Prefer to skip origination? Browse existing notes for sale on Note Central and become the lender on a loan that’s already in place.