How to Structure a Private Money Lending Deal (With Examples)

Private money lending offers flexibility; however, it requires careful due diligence. Whether you’re an investor looking to grow your portfolio or someone exploring passive income opportunities, understanding how private lending works can help you create steady returns while supporting other investors’ projects.

The Three Core Components of Any Private Money Deal

1. Loan Amount: How much is being borrowed
2. Interest Rate & Points: The cost of the capital
3. Repayment Structure: How and when the loan is repaid

Structure #1: Interest-Only with Balloon Payment (Most Common)

The borrower pays monthly interest only, with the full principal due at loan maturity (typically at sale or refinance).

Example: $150,000 loan at 10% for 12 months

• Monthly payment: $1,250/month
• Total interest paid: $15,000
• Balloon at maturity: $150,000

Best for: Fix-and-flip investors who need cash flow during renovation.

Structure #2: Deferred Interest (Accrued)

No monthly payments. Interest accrues and is paid along with principal at maturity.

Example: $150,000 at 10% for 6 months

• Total interest accrued: $7,500
• Total repayment at maturity: $157,500

Best for: Investors who want zero carrying costs during rehab.

Structure #3: Equity Participation

Lender receives a percentage of the profit instead of (or in addition to) interest.

Example: Lender funds $150,000 at 0% interest but receives 25% of net profit.

• Net profit on deal: $60,000
• Lender’s share: $15,000

Best for: High-upside deals where the borrower wants to reduce cash outlay.

Essential Legal Documents

Every private money deal needs:

• Promissory Note: The borrower’s written promise to repay
• Deed of Trust or Mortgage: Records the lien against the property
• Loan Agreement: Detailed terms and conditions
• Personal Guarantee (optional): Borrower’s personal liability
• Title Insurance: Protects lender’s lien position

First Position vs. Second Position Loans

First position lenders are paid first if the property is foreclosed. Second position lenders get paid only after first position is satisfied. Always understand your lien position—first position is standard for private money.

How to Protect Yourself as a Lender

• Never lend more than 70–75% LTV
• Get title insurance
• Record your deed of trust immediately
• Require hazard insurance on the property
• Have an attorney prepare all documents

Private money lending offers investors a way to earn consistent returns while helping others fund real estate deals. By understanding the process, setting clear terms, and protecting your capital, you can build a reliable income stream and long-term relationships in the real estate community. Start small, stay informed, and let private money lending become a cornerstone of your financial growth.

Get the full picture by reading private money lending rates, how to become a private money lender, and the legal requirements for private money lending.