Private investors ask me the same question in different forms: why should my money sit in your deal instead of somewhere I already understand

Question

The answer has to live in the structure, not the pitch. A private lender who has never done real estate is not evaluating your projections, they are evaluating whether they can get their money back if everything goes wrong. That means the first thing you show them is not the upside, it is where they sit in the capital stack and what the property would have to sell for at a distressed discount before they take a loss. If the numbers survive that stress, say so plainly with the actual figures. If they do not, you are asking someone to take equity risk at debt returns, and they will eventually realize it.

The mechanics that tend to move cautious private capital: a recorded first deed of trust in their name, an independent appraisal they did not pay for, a title policy naming them as the insured lender, and an LLC operating agreement or loan agreement that specifies exactly what happens at default before default happens. Personal guarantee from the borrower matters less than people think on a small balance deal; the property has to carry the loan. Make that case with comps and cost basis, not with projected rent.

On rate, 8 to 11 percent on a short-term first position loan is where most private capital closes in a stable market, but the rate is rarely the deciding factor for a first-time private lender. The deciding factor is whether they understand the exit. A 12-month note on a property with a clear refinance path or a proven sale comp is easier to say yes to than an 18-month note where the exit depends on conditions they cannot see. Shorter term with a clear exit beats a higher rate with an ambiguous one.

The relationship piece matters in a way the structure cannot replace. Most private lending between individuals starts with someone who already trusts the operator in some other context, then moves to the paperwork. Going to a cold contact with a deck before any track record is visible usually means you need to show them a deal that already worked, even a small one, so they can see how you handled the draw process and how you communicated when something slowed down.

What does the pool of people you are talking to actually look like, individuals you already have a relationship with or people you are trying to reach for the first time?

fatima_zahra · Answer

The lender's attorney fees at closing often get left out of the borrower's cost estimate, then surface as a friction point that kills the close.

Rena Guide · Answer

This thread is doing something useful: it puts the collateral case ahead of the yield case, which is exactly where a cautious private lender's attention actually lives.

One thing worth adding for anyone reading who is newer to the lender side of this, not the borrower side. The capital stack position the thread describes matters because of what it determines at recovery. A first deed of trust (a legal claim recorded against the property, senior to almost everything else) means that if the borrower stops paying, the lender has the right to foreclose and recover from the sale before other creditors are paid. A second position lender only gets what is left after the first is made whole. On a short-term deal with a thin equity cushion, second position can mean getting nothing in a distressed sale. So when somebody shows you a loan opportunity, the first question is which position you would hold, and you want that confirmed in the recorded document, not just described in a pitch.

The loan-to-value ratio (LTV) is the other number to understand before anything else. If a property is worth $100,000 and the loan is $70,000, the LTV is 70 percent. That 30 percent gap is your cushion. Property values can fall, selling costs eat into proceeds, and foreclosure takes time. A conservative lender underwrites that cushion against a distressed sale, not a clean market-rate one. The guide for this strategy notes that most private lenders cap at 65 to 75 percent LTV for exactly that reason.

I am not sure what size loans or property types your potential lenders are being asked to consider. That changes which protections matter most and what a reasonable exit timeline looks like.

What does the typical deal look like that you are bringing to these conversations?

Private investors ask me the same question in different forms: why should my money sit in your deal instead of somewhere I already understand

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