7 Must-Know Secrets for First-Time Private Money Lenders in Real Estate

Dipping your toes into private money lending for the first time can feel a bit like jumping into the deep end of the pool—without floaties. But don't worry, lending money in real estate doesn’t have to be scary! In fact, with the right knowledge, it can be one of the safest and most rewarding ways to build wealth (while avoiding that feeling of panic when your investments take a nosedive).

Let’s dive into the 7 secrets every first-time private money lender should know before they get started. Spoiler alert: there will be no floaties, but there will be solid advice—and a sprinkle of humor to keep things light.

1. Know the Deal (Not Just the Guy Who’s Asking for Money)

You know the saying: “Trust but verify.” This couldn’t be more accurate in the world of private money lending. Sure, the real estate investor pitching the deal may be your buddy, your second cousin, or that guy you met at a networking event who bought you a coffee, but don’t base your decision on personality alone.

Secret: Always make sure you understand the deal itself—how the money will be used, the projected returns, and, more importantly, how you’ll get paid back. (Pro tip: There’s no shame in asking for a second coffee if you’re going to lend someone a bunch of money.)

2. Collateral Is King (And It’s Not Just a Fancy Word)

One of the beauties of private money lending in real estate is the collateral backing your investment. If the investor can't pay you back, you don't just get a sad apology email—you get the property.

Secret: Make sure the loan is secured by real estate. This is your safety net, and it's far better than hoping your borrower wins the lottery. Always check that the loan is properly documented and recorded with a lien on the property.

3. Ask for a Plan (And No, "Trust Me" Doesn’t Count)

When someone comes to you for a loan, you’ll want more than just “this is going to be huge!” (Though enthusiasm is nice). You need a clear plan outlining how they’re going to use the funds, what the exit strategy is, and how long they expect the project to take.

Secret: Make sure there’s an actual timeline for the deal’s completion. If the investor’s plan seems vaguer than your uncle’s explanation of his “business venture,” you might want to reconsider. A good plan is like a GPS—without one, you’re just hoping for the best.

4. Understand Your Return (It’s More Than Just the Interest Rate)

Private money lending can offer attractive returns, often in the form of interest payments or profit-sharing. But don't just focus on the interest rate—there are other things to consider, like when you’ll start receiving payments and whether there are any fees that might nibble away at your returns.

Secret: Clarify how you’ll be paid back. Are you receiving interest monthly? Quarterly? At the end of the deal? Knowing how and when you’ll see your returns will help you plan—and prevent you from awkwardly asking for updates during Thanksgiving dinner if your cousin is the borrower.

5. Know the Market (Don’t Be Afraid to Do Some Homework)

You wouldn’t lend someone money to buy a yacht without first checking if they actually know how to sail, right? The same goes for real estate deals. Be sure to understand the market where the property is located and check if the deal makes sense.

Secret: Ask questions! What’s the after-repair value (ARV) of the property? How’s the local market performing? Even if you’re not an expert, you can get a feel for whether the investor has done their homework. If they haven’t… well, that’s your sign to pump the brakes.

6. Get It in Writing (Because Verbal Agreements Aren’t Your Friend)

You know what they say: "If it’s not in writing, it didn’t happen." In real estate lending, this is especially true. The more detailed the agreement, the better. You want everything in writing, from the loan terms to how you’ll be repaid.

Secret: Even if you're lending to a close friend or family member (cue the awkward silences at the next reunion), always have a formal loan agreement. This protects both of you and keeps things professional.

7. Prepare for the Unexpected (Because Life Happens)

Every real estate deal comes with risks, and sometimes things don’t go exactly according to plan. Maybe the property takes longer to sell than expected, or maybe the rehab budget spirals out of control. That’s why you should always have a contingency plan—both for you and the investor.

Secret: Make sure you understand the worst-case scenario. What happens if the property doesn’t sell? What if the market crashes? Knowing how the investor plans to handle potential setbacks will give you peace of mind—and help you decide if this is a risk worth taking.

Ready to Lend Like a Pro?

Private money lending can be a fantastic way to generate passive income and build wealth—when done right. The key is to go in with your eyes open, do your homework, and always protect yourself.

Whether you’re looking to start lending or want to expand your portfolio, I’ve got just the resource for you. Download my free ebook on becoming a successful private money lender in real estate and get the insider tips you need to lend with confidence.

Click here to get started and turn your hard-earned dollars into smart investments!