Introduction to Private Lending

Welcome to the world of private lending. In this book you’ll learn the details about the advantages, process and application of private lending and why investors choose to invest in real estate using private or “hard” money. Investing in real estate means you’re investing in a hard, secured asset providing much greater returns than most any other type of investment and with private notes, you know in advance how much profit you’re going to make and when.

Investing in real estate or private notes means your cash flow is enhanced because your capital and interest is returned to you once the project has been completed. You can choose to keep your investment working on the next deal and watch your interest compound over time or you can take your profits and put them in the bank. When you own the property, your property cash flows each month while gaining equity over time.
Private lending means your real estate transaction will close much faster. Private lenders make the decision on each and every deal and there is no “bank committee” that needs to review a proposal. The private lender can close deals in as little as 10 days. Private notes can range from as little as six months to two to three years, depending upon the needs of the developer while acquired real estate can be held for a flip or a long term hold.

-Theodore Zurla

Theodore Zurla is an experienced loan officer covering all realms of real estate finance. His companies are, “Nationwide Home Loans” a nationally recognized, premier lender offering the full suite of conventional& government-backed and“M&M Private Lending Group” specializing private loans. You can reach Theodore by email or by calling 954-439-0568.

I: What Is Private Lending?

Private lending is the oldest form of lending there is. It’s when an individual or collection of individuals loan money to another. There’s a lot more to it than that of course but that’s the explanation in its most basic form and has been around for centuries. It’s pretty simple, really. The “lender” would forward money or some other sort of collateral to another with the agreement when and how much the loan would be returned.

Conventional lending on the other hand, only came about a few hundred years ago when banks, or at least in the form that we know about banks, were formed. Individuals would store their valuables safely in a vault and would actually pay the vault owner to securely keep their valuables away from thieves. The bank would then use the deposited funds to lend to others and then charge even more for the purpose of whatever the borrower needed the funds for. Then, the primary form of income resulted from agriculture so the funds were used to buy land, seed and tools. The lender would then in return receive profits from the farm, take ownership of part of the farm or a combination of both

Private lending is often referred to as “hard money” lending or hard money loans. The term is coined “hard money” due to the terms of the note compared to say what someone might get down at the local bank. Interest rates and fees will be higher for a private money or hard money loan compared to an institutional loan. Private lenders will finance a project that a bank might not due to the nature of the property being acquired. How so?

Banks and conventional lenders use the property being financed as collateral. Should the loan ever go into default, the bank wants to see if the property being acquired could easily be sold. Conventional lenders for example underwrite both the property as well as the borrower.

The borrower is evaluated based upon income, assets, employment and credit history. As it relates to income there needs to be sufficient gross monthly income verified to handle the new mortgage payment, property taxes, insurance and other monthly credit obligations such as an automobile loan or a credit card. This is accomplished by reviewing copies of recent pay check stubs, W2 forms or income tax returns. Lenders will also make sure the borrower comes to the closing table with some sort of a down payment in the form of cash and this amount will vary based upon the loan program. There should also be an employment history of at least two years as well as verification of a responsible credit history.

While the lender is evaluating the borrower the lender also orders a property appraisal. The property needs to be common for the area where it’s located and have recent sales of similar properties in the neighborhood. The property must also be in good condition with no deferred maintenance or major repairs needed. The lender reviews the property appraisal and makes the determination whether or not the property meets lending guidelines.

Once the borrower and the property are approved, the lender funds the loan and can then sell the loan in the secondary market. The secondary market is where lenders buy and sell mortgage loans to one another or directly to Fannie Mae or Freddie Mac. Selling an approved loan replenishes a mortgage companies’ credit lines in order to make even more loans. This cycle is repeated over and over again and is dependent upon the liquidity the secondary market provides.

Private notes on the other hand have no such secondary market. Private lenders use their own underwriting standards when deciding whether or not to approve a loan application and once the loan is approved and funded the lender will need to have the private loan paid back. That’s the liquidity needed for a private money lender. If the lender doesn’t see how the project will work out it won’t approve the loan.

This is known as the borrowers’ “exit strategy.” How will the borrowers pay back the loan once the project has been completed? The exit strategy is just as important as any other aspect of the loan approval. You may have a borrower with an 800 credit score and a 30% down payment but if there is no clear exit demonstrated the loan is likely to be declined.

For example, let’s say there’s a developer that likes to buy and rehab rental properties. The specialty is to locate properties that are in some state of disrepair and buy them at a discount. So much a state of disrepair that a bank won’t even consider approving the project. Take a duplex where one of the units needs a new roof, HVAC and the pier-and-beam foundation appears to be shifting. No bank would loan on this project. The closest to an institutional approval would be a loan for a tear-down and new construction.

The developer visits the potential purchase with his contractor and makes a complete inspection of the units. The roof does need to be replaced and the current HVAC systems for both units are shot. The foundation however seems to be in okay shape but the contractor does suggest to shore up the existing foundation. The total costs to repair are about $25,000. The developer can makes an offer for the duplex to the owner at $125,000.

The developer also speaks with his appraiser who evaluates the future value of the property once all the repairs are made as well as do a survey of local market rents for other duplexes in the neighborhood. Once repaired and brought back into shape the developer could sell the duplex for $200,000. Before selling costs are deducted, that’s roughly a $75,000 profit.

Or, the developer could keep the property and collect the monthly rent from each of the units. Once the project has been completed the existing private money note is repaid either by the developer refinancing the duplex into a traditional non-owner occupied conventional loan or by selling the property to a buyer.

Many developers have relationships with clients who regularly buy rental properties as they complete them and most often not only does the developer know the exit strategy but even has a buyer or list of buyers who will purchase the duplex once repaired and is an excellent business model. The developer can present an investment opportunity to their buyers who can then review the project and decide whether or not to buy the unit. In this manner the developer already knows the exit strategy and how much profit will be made on the next project.

Developers and their clients work in tandem. The developer is out looking for deals while the clients wait for the next opportunity. This exit strategy needs to be prepared and documented when submitting an application for a private loan. It’s not enough just to approve the borrower and the property but feel confident the developer will have the funding in place to replace the private loan once the project has reached completion stage. Many times when proposing a project for a private loan there is also an accompanying sales contract showing a ready, willing and able buyer who has agreed to buy the property when all work is repaired.

Because private lenders use their own internal guidelines they may also gravitate toward certain types of properties as do developers. Let’s look at that same developer who bought the duplex. Over time, the developer perfects the evaluation process to the point where both the private lender and the developer know what needs to be done in advance of any loan approval.

Or, a developer might have a penchant for multi-family properties. Apartment buildings are always a good investment for a developer if the building can be stabilized and cash flow established. Apartments can find themselves in disrepair in need of improvements but just like the duplex we talked about no bank is going to lend. Private money, or hard money, can fix that problem. Otherwise, the apartment building will continue to fall into disrepair and ultimately be torn down.

Private loans carry their own internal guidelines but as we’ve mentioned there is certainly some flexibility from the individual investor’s end. A group of investors can pool their funds and provide financing for properties that don’t meet traditional guidelines but with a private loan, those same properties can be transformed into marketable real estate.

Private loans will require a down payment of at least 35% in most cases with interest rates ranging from 8.00% to 14.00% or higher. Rates and terms initially quoted will be reviewed more closely once a specific property has been located. Loan terms can range from a few weeks to a few years but few private loans last for more than three years. The private loan is put into place in order to rehabilitate an existing property and not used as a long term solution.

Private loans for residential properties are reserved for non-owner occupied units and can be used for purchase, refinance, rehab and cash out.

In the next section we’re going to talk about where private money comes from and how private lenders fund these projects.

II: Private Money- Where Does It Come From?

Okay, so if a retail bank down the street won’t make a loan on a distressed or unfinished property, where do the funds come from? Funds for such projects come from private or hard money lenders. Remember in the previous chapter how conventional lenders are able to sell the loans they make in order to place even more mortgages? They get their money primarily from credit lines established at their own bank or institution. Private lenders get their money from various sources.

One-way private lenders access capital is through a credit line of their own. They are able to access funds at a relatively low rate and charge a higher one. Once the private loan is paid off the lender then pays down the original amount borrowed, replenishing their available funds. But the most common way to develop capital is through private sources from individual investors or investor groups.

Individual investors can provide the necessary funds to finance private loans either all or in part of any particular transaction. There are two ways called pooled funds and fractional.

Pooled funds are those where individual investors invest an initial amount with a private lender and in return are provided interest on those deposits. For example, let’s say a private lender solicits 10 individuals seeking $2 million from each for a total amount of $20 million. This fund now has enough readily available cash to fund any project the private lender approves. The individual investors are provided interest on the deposited funds.

Let’s say a developer wants to buy and rehabilitate a mixed-use office building. On the first floor is commercial space and the second and third floors are residential units. The property is mostly unoccupied and the commercial space is essentially empty but the developer is partnering with a restaurant group who wants to open up in a new space. The apartments are occupied but only half so. The purchase price is $1 million and the rehabilitation and stabilization costs are estimated to be $750,000 for a total cost of $1.75 million.

The developer prepares a plan to present to the private lender, breaking down where the costs will be allocated, how long the project will take and what the property would be worth after a complete remodel. An appraiser has prepared a report that states the finished project would be worth $3.5 million, or more than twice the cost to acquire and repair. The developer also has a buyer, the restaurant group, who has lined up financing from their bank for a permanent loan.

The private lender reviews the plan and approves the project. Because the funds are readily available, the loan issued to the developer in a matter of days. Once the private loan has been paid off, the funds are returned to the original pool and the interest distributed to each individual investor.

Fractional investing means each individual investor provides funds for a specific project. Let’s look again at this same property. The costs come to $1.75 million and a presentation is made to the private lenders’ pool of individual lenders. One investor likes the project and commits to provide $250,000. Another investor approves the idea and pledges $500,000, still another $300,000 and so on until the needed amount is met. Or, one individual investor decides to take on the entire project and provide the needed $1.75 million for the project.

The funds are issued to the developer and after completion and the private loan has been paid off with commercial financing the individual investors are paid back both their original investment plus interest that has accrued during the renovation.

During the time the private lender is having investors review the proposal there are of course individual investors who will decide not to invest in a particular project. They can review a proposal and decide either it’s not the right time or the investor doesn’t like the property.

Private lenders know the different investor’s tastes and will typically deliver a proposal to in investor who likes 2-4 unit investment properties while another investor prefers office buildings while yet another investor prefers apartments. Individual investors who are new to private lending may take some time to warm up to the prospect and invest only in smaller amounts until they begin receiving their interest payments and a relationship has been established

Private lenders typically prefer to invite those who have attained accredited investor status. An accredited investor is a defined term as laid out in what is known as Rule 501 of Regulation D of the United States Securities and Exchange Commission. An accredited investor is someone with a minimum net worth of $1,000,000, excluding one’s primary residence, or have income of at least $200,000 for the last two years and if married, $300,000 each year. Why solicit from accredited investors?

It is assumed that someone who has attained this particular status of net worth and/or makes at least $200,000 has enough financial understanding of credit markets and investing overall. When private lenders solicit funds only from accredited investors, they are not required to provide reports descriptions of public offerings to the Securities and Exchange Commission. Because private lenders present investor opportunities to invest in private notes secured by real estate, if they solicit the general public the filings and reporting with the SEC is time consuming and costly. Working with accredited investors only saves both time as well as money which ultimately keeps financing costs lower than they otherwise would be.

III: The Critical Importance of Private Lending in the Real Estate Industry

Okay, so now we know what private money and hard money is and where it comes from, but is it really all that important? Compared to other types of financing, private lending fills a special niche. Conventional residential loans are the most common types of mortgage lending. When you consider the number of banks, mortgage bankers and mortgage brokers compared to the number of private lenders, you may wonder where private lending fits in the big real estate picture. But perhaps to highlight the need for private lending in the best way, let’s reverse engineer a hard money application.

There is an apartment building close to downtown. There is some commercial space on the first floor consisting of two restaurants, a flower shop and a bakery. The building has four floors plus underground parking. The top three floors are condominium units, six on each floor for a total of 18 and most all are owner occupied. There is currently one unit listed for sale at $350,000. The complex provides easy access to downtown where many of the owners work

When the 18 units are sold at $350,000 each, that generates 18 separate mortgages. That totals $6.3 million dollars. The lenders that made those loans are all collecting monthly interest on the notes and are a healthy source of revenue for them. They in turn are able to not only collect the monthly mortgage payments but also have the ability to sell the note in the secondary market for a profit.

Property taxes on the residential units generate another $63,000 in revenue for the city. The two restaurants combined collect another $45,000 in sales taxes each year. The other two retail outlets collect another $8,000. Property taxes for the commercial space generate $90,000 per year. The retail space also provides jobs for 30 people, both part and full time for a total of $550,000 worth of pay checks.

Just from this single apartment building the economic impact is impressive. $6.3 million in home loans issued. About $200,000 total in various property taxes as well as employing 30 people and handing out $550,000 in gross income.

Yet just a year ago the building was vacant and the property was in such shape the owner was having problems selling the property and didn’t have the financial backing to make the critically needed repairs.

They began preparing their proposal while their real estate agent began marketing the property and searching for commercial tenants who wanted to locate to this area. They found six who expressed interest and found four who expressed a keen interest in what they had planned. There were two restaurants and an individual who owned a series of flower shops and bakeries around town.
The got together with an architect who began crafting the designs for the project and the contractor put together a bid for the work which included all costs plus some added for any change orders that will likely come up during the renovation.

After a few weeks, they had a final proposal in hand that included blueprints, cost breakdowns, fund control estimate and estimated completion date. They took the proposal to their bank and talked it over with their banker. The banker expressed interest in the idea but didn’t want to fund the project due to the current state of the property but did say that with some improvements and final inspection the bank could step in and help out with a commercial loan. Based upon that suggestion, the banker penned a letter stating interest in the project.

The developers then visited their private lender who reviewed the entire package along with the letter from the bank. The developer first ordered an appraisal to see if the final value would be what the original appraisal report suggested. The appraisal came in very close to the first one and the private lender agreed to issue a hard money loan to buy the property and finance the renovations.

The project began and 10 months later it was completed. The real estate agent already had contracts on 14 of the condominium units so they were presold. The commercial tenants began moving in and after another two months the property was completely stabilized and generating significant revenue. The bank then stepped in and replaced the private note with a traditional commercial mortgage. The property today is well worth more than $12 million.

The project began and 10 months later it was completed. The real estate agent already had contracts on 14 of the condominium units so they were presold. The commercial tenants began moving in and after another two months the property was completely stabilized and generating significant revenue. The bank then stepped in and replaced the private note with a traditional commercial mortgage. The property today is well worth more than $12 million.

But none of this would have happened without the power of private lending.

Private lending is sometimes referred to as the kick starter. Private lenders see properties differently than a traditional lender and look at a property’s potential and not the property’s current condition. Traditional banks and mortgage lenders also see the value of private lending. Without private lending, banks and mortgage companies would see their markets shrink.

Seed capital initiated by private lending is a tide that lifts all boats. The impact and necessity of the private lending industry is apparent to those involved but for many private lending is largely an unknown commodity.

IV: Comparing Asset Classes

When you sit down with your financial planner each year and review your current allocation of funds and rearrange your assets to more closely align with your financial plans, it’s typically a notion of stocks, bonds and mutual funds. Maybe even commodities such as precious metals. But you probably have never heard your financial planner talk about private notes. And with all due respect, a financial planner or investment advisor doesn’t make any commission when suggesting private notes or perhaps private notes never even comes to mind. But the topic should be explored because real estate and private notes have some advantages that other asset classes do not share.


Let’s take a look at an individual stock. Any stock of any publicly traded company. When the company needs to raise capital, it can do so by selling shares of the company. In return, the investor hopes the company’s stock will rise in value as the company continues to grow and profit. Perhaps the company pays quarterly dividends based upon performance and the investor not only sees the value of his individual holdings in the company but also gets some small share of profit as dividends are handed out to shareholders.

Picking out individual stocks is something that even experienced stock brokers can’t master. Surely you recall when the Wall Street Journal asks a group of stock brokers to pick some stocks they think will perform while at the same time throwing darts toward a list of stocks. You would think the stock brokers would win hands down but that’s not the case. Even the darts performed better at times than the paid professionals. There are just too many variables that can affect the value of a company’s stock from executive level management to economic or political events both here and abroad.

But what happens when the company doesn’t pay dividends? Paying out dividends is slowly fading way as a practice and instead companies keep the cash for operating expenses, expansion or acquisition. And, what happens if the company doesn’t grow but begins to falter? When a company begins to underperform investors can sell the stock to avoid any further losses. If the company falls too much it can go bankrupt. When this happens, the common shareholder can lose everything.

Once a company files for a Chapter 11 discharge for instance and a trustee is assigned, senior creditors are paid with the company’s remaining assets and all too often there isn’t enough left in the till to pay off the individual who purchased the company’s stock. The value of the stock can go directly to zero and the investor is left with nothing.

Mutual Funds

To mitigate the risk of buying individual stocks, investors typically place their money in a mutual fund. There are hundreds of mutual funds and they’re all individually labeled based upon the investors risk tolerance. A particular mutual fund might have a high reward but also high risk. Or, an investor can choose to invest in a mutual fund that is a mix of individual stocks designed to weather economic storms and balance out the risk of one individual stock to another. One can invest in mutual funds consisting only of “Blue Chip” corporations or invest in a particular sector such as pharmaceuticals or financials.

An entire industry has formed that does nothing but rate mutual funds based upon past performance and projected returns and investors can make choices based upon these ratings. A mutual fund won’t see its value drop to zero but the mutual fund manager can liquidate it. You can also do your research on a particular mutual fund and decide you want to invest in that particular fund and when you prepare to invest your find the fund managers have closed the fund to new investors.


We talked about bonds in an earlier section but they’re also in the mix of a typical investor’s assets. They’re low return but they’re safe. Still, there are different types of bonds from which to choose. There are high-yield bonds. There are municipal bonds that are tax-free on the federal level. Investors tend to allocate more of their investment funds into bonds the closer they get to retirement with the goal of earning enough money from bond yields to pay for retirement expenses.

Precious Metals

Precious metals are another option but instead of investing money and receiving ownership of a stock, bond or mutual fund, precious metals are a physical asset you can actually hold in your hand. Gold or silver coins can rise in value over time and can be a preferred method to protect against inflation. There are also other precious metals you can invest in such as platinum and palladium which can also be bought and sold.

Real Estate

When you invest in real estate by investing in private notes there are a few distinct advantages real estate has compared to stocks, mutual funds, bonds and precious metals. First and foremost, the value of the real estate being financed will never go to zero. When financing with private notes, the investment is secured by the property. The note is recorded in a first lien position and released when the private loan is paid off with a traditional mortgage.

Private notes are of shorter term in nature and provide greater returns compared to say a mutual fund without the risk associated with buying an individual stock. Real estate is a physical asset you can actually touch and visit. You can visit what you’re investing in.

You can invest in real estate directly without investing in private notes. However, owning real estate and holding it for the long term means you’re also going to become an instant landlord. Something that some owners discover all too late it’s not something they signed up for.

You can invest in real estate directly without investing in private notes. However, owning real estate and holding it for the long term means you’re also going to become an instant landlord. Something that some owners discover all too late it’s not something they signed up for.

But this is why there are property managers. Property managers can take care of the daily maintenance needed for rental properties beyond making repair calls but also collecting the monthly rent, screening tenants and even showing the property when the lease is about up. Finding good tenants makes a landlord’s job easier but getting a bad one can be a nightmare.

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