Private Money Financing Guide

What is private money financing?

Private money is real estate financing funded by private capital — individual investors, family offices, private credit funds, or specialty lenders that raise and deploy their own money rather than depositing and lending like a bank. The loans are short-term, secured by the property, and made on terms set by the capital source rather than by an agency guideline.

The industry uses several names for roughly the same product. Hard money is the oldest term and emphasizes the hard asset behind the loan. Bridge loan emphasizes the timing role, spanning the gap between two positions. Fix-and-flip loan describes the most common use case. The underwriting logic is consistent across all of them: the property and the exit carry the file.

What separates private money from conventional lending is not risk tolerance so much as the question being asked. A conventional underwriter asks whether the borrower can afford the payment for thirty years. A private lender asks whether the property is worth enough today, will be worth enough after the work, and whether the borrower will realistically be able to repay in twelve to eighteen months through a sale or a refinance.

That narrower question can be answered quickly, which is the entire product advantage. A file that would take forty-five days through a conventional channel can often be underwritten and funded in seven to fourteen days, and occasionally faster on a repeat borrower with a familiar property type.

When private money is the right tool

Private money is expensive capital. It is the correct choice when speed, flexibility, or property condition make conventional financing unavailable, and when the transaction generates enough value to absorb the cost comfortably.

The clearest use case is a property that cannot be financed conventionally today. A house with a failed roof, no functioning kitchen, or active code violations will not pass an appraisal for conventional or even most DSCR financing. Private money funds the acquisition and the repair, and the finished property then qualifies for permanent financing.

The second use case is time. Auction purchases, estate sales, and competitive off-market deals frequently require proof of funds and a two-week close. A private lender can meet that timeline; an agency lender generally cannot.

The third is bridging. An owner who has found the next property but has not closed the sale of the current one can borrow against existing equity to move first and repay from the sale proceeds.

Private money is the wrong tool when the property already qualifies for conventional or DSCR financing, when the timeline is comfortable, or when the projected margin is thin enough that a few months of carry would erase it. Paying two points and eleven percent to acquire a stabilized rental that would have qualified for a DSCR loan at a far lower cost is a self-inflicted wound.

How private lenders underwrite a deal

Private underwriting is a compressed review of four things: the property, the plan, the borrower's capacity to execute, and the exit. Income documentation may be minimal, but that does not mean the file is unexamined. The scrutiny simply lands in different places.

Value comes first. The lender establishes as-is value through an appraisal, a broker price opinion, or an internal valuation, and — where rehab is involved — an after-repair value based on the scope of work and comparable finished sales. The after-repair figure is treated skeptically, because it is the number most often inflated by optimistic borrowers.

The plan is next. A scope of work with line-item costs, a contractor selection, a permit assessment, and a realistic timeline tell the lender whether the budget is credible. A scope that assumes a full gut renovation completed in eight weeks for a fraction of local costs signals inexperience.

Capacity is assessed through experience and liquidity rather than through a debt-to-income ratio. Prior completed projects reduce pricing and increase leverage. Verified cash to cover the down payment, closing costs, first-phase construction spend, and several months of interest carry is nearly always required.

The exit closes the analysis. If the plan is a sale, the lender looks at days on market and pricing for comparable finished product. If the plan is a refinance, the lender looks at whether the finished property will support the takeout loan — most often a DSCR loan sized on rent, or a conventional loan if the borrower will occupy or can document income.

Experience is the single largest driver of both leverage and price. A borrower with three to five documented completed projects will typically see materially better terms than a first-time investor on an identical property.

Leverage: loan-to-cost, loan-to-value, and after-repair value

Private money leverage is usually expressed through more than one constraint at the same time, and the loan amount is set by whichever constraint binds first. Understanding which one controls your deal is essential to knowing how much cash you actually need at closing.

Loan-to-cost measures the loan against the total project cost — purchase price plus renovation budget. A lender offering ninety percent of purchase and one hundred percent of rehab is quoting in loan-to-cost terms.

Loan-to-value measures the loan against the property's current as-is value. On a purchase, this usually mirrors the price. On a refinance or bridge, it is the controlling number.

After-repair value caps total exposure against the finished value, most often in the sixty-five to seventy-five percent range. This is the constraint that most frequently reduces a quoted loan amount at the eleventh hour, because it is the one that depends on an appraiser's opinion rather than on contract figures.

A worked example: a property under contract at $400,000 with a $100,000 renovation budget and an after-repair value of $600,000. At ninety percent of purchase and one hundred percent of rehab, the indicated loan is $460,000. At seventy percent of after-repair value, the cap is $420,000. The lower figure controls, so the loan funds at $420,000 and the borrower brings the difference in cash.

Ranges are illustrative of common market structures and are not an offer of terms. Actual leverage depends on lender, market, property type, borrower experience, and project scope.

Rehab holdbacks, draws, and inspections

Renovation funds are almost never advanced at closing. The lender funds the acquisition portion and holds the rehab budget in a controlled account, releasing it in stages as work is verified complete. This protects the lender from funding a project that stalls, and it shapes the borrower's cash flow more than any other feature of the loan.

The mechanic is straightforward. The borrower completes a phase of work using their own funds, requests a draw, and the lender orders an inspection — increasingly a photo or video inspection rather than a site visit. Once the completed work is verified, the lender wires reimbursement, typically within two to five business days.

The consequence is that the borrower funds each phase before being repaid for it. A project with a $120,000 budget released in four draws requires roughly $30,000 of working capital in continuous rotation, on top of the down payment and closing costs. Underestimating this is the most common cause of stalled projects.

Draw discipline matters. Batch small items into meaningful draws to avoid paying repeated inspection and wire fees. Keep permits current, because an inspector who finds unpermitted work can hold a draw. Manage lien waivers from every contractor and material supplier as work completes, since an unreleased mechanic's lien can block both the next draw and the eventual payoff.

Pricing: points, rate, fees, and true cost of capital

Private money pricing has two dominant components and several smaller ones. Origination points are charged up front as a percentage of the loan amount, commonly one to three points. The interest rate is charged monthly on the outstanding balance, commonly in the high single digits to low teens depending on market conditions, leverage, and borrower experience.

Because the term is short, points dominate the true cost of capital. Two points on a twelve-month loan add roughly two percentage points to the effective annual cost. Two points on a four-month flip add roughly six percentage points, because the same fee is amortized over a third of the time. Fast projects are not automatically cheap projects.

Interest is charged in one of two ways, and the difference matters. Interest on the full loan amount — sometimes called full boat or non-dutch — accrues on the entire commitment including undrawn rehab funds from day one. Interest on drawn balances only — sometimes called dutch or as-disbursed — accrues only on funds actually advanced. On a rehab-heavy deal, the difference over a twelve-month hold can be several thousand dollars.

Beyond points and rate, expect an underwriting or processing fee, a valuation fee, a document preparation fee, draw and inspection fees, and often an exit or payoff fee. Ask for a complete fee schedule in writing and calculate total dollars, not quoted percentages.

Figures are illustrative arithmetic on a hypothetical loan, not a rate quote. Actual pricing varies by lender, market, leverage, property type, and borrower experience.

Term length, extensions, and default mechanics

Private money terms typically run six, twelve, or eighteen months, occasionally twenty-four. The term is a hard maturity date, not a soft target. On the maturity date the entire balance is due, and there is no automatic conversion to a longer loan.

Projects run long. Permitting delays, material lead times, contractor turnover, and slow markets are routine, and a meaningful share of loans reach maturity before the exit is complete. This is why extension terms deserve as much attention at closing as the rate does.

Most lenders offer one or two extensions, commonly three to six months each, in exchange for a fee — often a half point to one point of the loan amount — and sometimes a rate increase. Confirm before closing whether extensions are contractual or discretionary. A discretionary extension is not a plan.

If the loan matures unextended, default interest applies. Default rates are punitive by design, frequently in the high teens to mid twenties, and late fees compound the pressure. Foreclosure timelines on business-purpose loans can be considerably faster than on owner-occupied consumer mortgages.

Prepayment works in the opposite direction. Some loans carry a minimum interest guarantee — three to six months of interest owed regardless of how quickly the loan is repaid. A fast flip against a six-month interest minimum pays for time it never used, which should be priced into the deal before the offer is written.

Entity vesting, guaranties, and business purpose

The overwhelming majority of private money loans are business-purpose loans made to an entity rather than consumer loans made to an individual. Title vests in an LLC or corporation, the note is signed by the entity, and the principals sign a personal guaranty behind it.

The business-purpose distinction is substantive, not cosmetic. Consumer mortgage regulation — ability-to-repay rules, disclosure timing, and servicing requirements — attaches to loans secured by an owner-occupied residence for personal, family, or household purposes. Business-purpose loans sit outside that framework, which is precisely why they can be underwritten and closed quickly.

That is also why private money for a primary residence is rare and heavily constrained. Lenders who will do it are subject to consumer rules, which slows the process and narrows the product. Anyone considering occupying a property financed with private money should raise it explicitly and early; misrepresenting occupancy on a business-purpose loan is loan fraud.

Practical entity mechanics: form the LLC before the offer where possible, keep the operating agreement and certificate of good standing current, ensure the entity name on title exactly matches the note, and obtain a separate EIN and bank account. Insurance must be a builder's risk or vacant-property policy naming the entity as insured and the lender as mortgagee — a standard homeowner's policy will not satisfy the requirement on a vacant renovation property.

Designing the exit before you close

The exit is the loan. Everything else is a detail. A private money loan is a bet that a specific repayment event will occur within a specific window, and the borrower should be able to describe that event in concrete terms before signing.

Sale exits depend on finished pricing and absorption. Analyze days on market for comparable finished product in the same submarket, not the neighborhood average, and build a realistic marketing and closing period into the timeline. Selling costs — commission, transfer taxes, concessions — routinely consume six to nine percent of the sale price and must be modeled.

Refinance exits depend on the takeout lender's rules, and those rules should be confirmed before the private loan closes, not after the work is done. Three parameters govern: seasoning, which is how long the property must be owned before the new appraised value can be used rather than the purchase price; leverage, which caps the takeout loan; and documentation, which determines whether a DSCR, bank statement, or conventional file is the path.

For a stabilized rental, the most common takeout is a DSCR loan sized on the property's rent rather than on personal income. That means the exit hinges on achieving a rent level, which means the renovation scope should be designed toward that rent — not toward the borrower's personal taste.

Every project deserves a written secondary exit. If the sale does not happen at the projected price, can the property be rented and refinanced? If the refinance appraisal comes in low, is there cash available to buy down the balance? A loan with only one exit is a loan with no margin for the ordinary.

The most common cause of a distressed private money loan is not a bad property. It is a good property with an exit that was assumed rather than verified.

Running the numbers on a project

A private money deal analysis has five stacks: acquisition, financing, construction, carry, and disposition. Missing any one of them produces a profit projection that will not survive contact with the project.

Acquisition is the purchase price plus closing costs — title, survey, transfer taxes, and inspections. Financing is points, underwriting and valuation fees, and document preparation. Construction is the scope of work plus a contingency; ten to fifteen percent is a working minimum, and older or coastal structures warrant more.

Carry is the expense that most analyses understate. It includes monthly interest, property taxes, insurance, utilities during renovation, HOA dues, and any security or maintenance cost, multiplied by the true hold period rather than the optimistic one. Disposition is commission, seller concessions, transfer taxes, and closing costs on the sale, or the origination cost of the refinance.

Sensitivity testing is the discipline that separates durable investors from lucky ones. Run every deal at the projected case, then rerun it with the after-repair value reduced by ten percent, the budget increased by fifteen percent, and the timeline extended by three months. If the deal still works under all three simultaneously, it has real margin. If it fails under any one alone, it is a thin deal that requires everything to go right.

Document checklist

Private money files are lighter than conventional files but not empty. Speed comes from having the package ready before the offer is accepted, because the underwriting window is short and a missing entity document can cost the days the loan was chosen for.

The process, step by step

A well-prepared private money transaction moves through a predictable sequence. Knowing the sequence lets you place your documents ahead of each step rather than behind it.

Typical timelines run seven to twenty-one days from term sheet to funding when documents are ready. The most common delays are missing entity paperwork, insurance bound late, and title issues discovered rather than anticipated.

Private money compared with other financing paths

Private money is one option among several for investment and transitional properties. The right choice depends on property condition, timeline, and how the borrower's income can be documented.

DSCR financing is the natural successor to private money on a stabilized rental. It is long-term, sized on the property's rent rather than personal income, and priced far below private money — but it requires a property in rentable condition and typically imposes seasoning before the improved value can be used.

Conventional and portfolio financing offer the lowest cost but demand documented income, an appraisable property, and a longer timeline. A no-ratio or bank statement loan sits in between, removing income documentation friction while retaining long-term structure and a materially lower rate than private capital.

A home equity line on an existing property is often the cheapest source of acquisition capital for investors who have equity, though it is slower to establish and puts a primary residence at risk. Many experienced investors run a line of credit for down payments and use private money only for the acquisition and rehab leverage.

Florida market considerations

Florida is one of the most active private lending markets in the country, and it carries local variables that materially affect both underwriting and project economics.

Insurance is the first. Property insurance cost and availability shape carry expense more in Florida than in almost any other state, and a vacant renovation property requires a builder's risk or vacant-property policy that is priced well above a standard homeowner's policy. Obtain a bindable quote during due diligence, not after the term sheet.

Wind mitigation, roof age, and the four-point inspection drive both insurability and the refinance exit. A roof approaching the end of its documented life can make a finished property difficult to insure at a reasonable premium, which in turn complicates the takeout. On many Florida rehabs, the roof is an exit requirement rather than a cosmetic upgrade.

Coastal and 30A-corridor projects along Destin, Santa Rosa Beach, and Panama City Beach combine high finished values with elevation, flood-zone, and coastal construction control line requirements. Permitting timelines in these jurisdictions are frequently longer than inland markets, and the loan term should reflect that.

Condominium projects across South Florida carry structural reserve and milestone inspection requirements that can affect both financeability and value. Confirm the association's reserve study and any pending special assessment before underwriting the exit.

Short-term rental exits in Orlando, Kissimmee, and the coastal panhandle depend on municipal and association rules that change. A refinance sized on short-term rental income requires that the use be permitted where the property sits and that the documentation the takeout lender accepts is achievable.

Common mistakes and how to avoid them

Private money failures follow recognizable patterns, and nearly all of them are preventable at the analysis stage rather than the execution stage.

Every one of these is caught by the same two habits: verify the numbers with third-party evidence, and write the fallback plan down before closing.

Next steps

Start with the exit, not the acquisition. Confirm what the takeout lender will require, then work backwards to the scope, the budget, and the leverage the deal can support.

Bring a specific property or a specific buy box to a consultation. Private money terms are deal-driven, and a general question produces a general answer. With an address, a scope, and a timeline, terms can usually be quoted quickly.

Have the entity, insurance, and track record package assembled before you need them. The speed advantage of private capital is only real when the borrower is as fast as the lender.

Private money and hard money financing terms — including rates, points, leverage, term length, draw procedures, extension options, exit requirements, and eligible property and occupancy types — vary by lender, capital source, project, market, and borrower experience. Private money is generally a business-purpose product and is not available for every transaction or in every state. This guide is educational and is not a loan approval, a commitment to lend, a Loan Estimate, or legal, tax, or investment advice. Terms change frequently; current requirements should be confirmed with your licensed mortgage advisor.