Private Lender Or Hard Money Lender: How To Be Successful

Becoming a Pro at being a private lender or hard money lender is what you’ll be when you know your business inside and out. You’ll be able to be paid on time, be able to evaluate borrowers and collateral, as well as know what to do when things go wrong.

In This Article

Understand LTV and why it’s critical.

Loan-to-Value (LTV) is one of the most important numbers you’ll use as a private or hard money lender. It tells you how much of the property’s value is being financed through your loan. For example, if a borrower wants $100,000 on a property worth $200,000, the LTV is 50%.

Why does it matter? Because LTV is your margin of safety. A lower LTV means you’re more protected if the borrower defaults or the market dips. If you need to foreclose and sell the property, your chances of recovering your investment are much higher. Sticking to smart LTV limits—usually 65–75% or less, depending on the property type—can make the difference between profit and loss.

Learn about Safe Loan to Value and why it matters.

Examples of LTV in hard money loans for single family homes, multi family, vacant land

Understanding Loan-to-Value (LTV) is critical when lending. It’s your first line of defense against risk. Here are some typical LTV guidelines based on property types:

• Single Family Homes: Hard money lenders typically offer up to 65–75% LTV on residential properties in good condition. These are often considered less risky, especially in stable markets.
• Multi-Family Properties: For 2–4 unit buildings, expect a slightly lower LTV range of 60–70%, depending on occupancy and income potential. For larger buildings (5+ units), 55–65% may be more appropriate.
• Vacant Land: This carries more risk due to lack of income and potential development hurdles. Most lenders stay under 50% LTV, and often require a clear exit strategy such as resale or construction financing in place.

Don’t assume that because you’re currently in a rising real estate market, that a higher LTV is ok, because if the market turns, that extra LTV could mean negative equity.

Always use a professional appraisal to verify the value.

Evaluate Your Borrower: What Criteria?

Not all borrowers are created equal. Whether lending to a professional investor or a first-time flipper, you’ll want to check:

• Communication: Are they responsive and clear? Trust your gut—communication is key when things get tricky.
• Experience: Have they successfully completed similar projects? Ask for references or a project portfolio.
• Skin in the Game: Are they putting in their own funds? A borrower who invests their own capital is less likely to walk away.
• Exit Strategy: Do they have a solid plan to repay the loan—sale, refinance, or other? This should be realistic and time-bound.

What Credit Score should your Borrower have?

Hard money lending is asset-based, so credit isn’t always a deal-breaker, but it still matters. Learn more about Credit Scores.

• Ideal range: A score of 620 or higher is often preferred, but many lenders work with scores as low as 580, especially if LTV is conservative.
• Red flags: Watch for recent bankruptcies, tax liens, or a pattern of default. Even if you’re willing to take on the risk, price it accordingly with higher interest or fees.

Find a Borrower

Great deals don’t just land in your lap, you have to look for them. Here’s how:

• Network with real estate investors at local meetups or online groups (e.g. BiggerPockets, LinkedIn).
• Partner with brokers who can bring you pre-vetted deals and borrowers.
• List your lending services on platforms for private and hard money lenders.
• Work with wholesalers or flippers looking for fast financing options.
• Drive around the local area you want to lend in and look for developers building the sort of property you would want to lend on. They’ll probably have a sign up along with contact information.

The more active you are in the investment community, the better your borrower pipeline will be. The more you meet people in person, the more likely you are to screen out any potentially bad borrowers or time wasters.

Get Paid On Time Every Time: How to Make This Happen

Cash flow is king. Here’s how to protect yours:

• Use loan servicing software to help you with your mortgage. We recommend Lender Spreadsheet that covers everything you need to originate and manage your loan.
• Require automatic payments through ACH to avoid missed deadlines.
• Set up escrow for taxes and insurance, especially on longer-term loans.
• Include penalties for late payments and enforce them. Structure your contracts with clear timelines and consequences.
• Stay in touch with your borrower. A quick call or message near due dates can go a long way.

Check out our FREE resources that include online calculators as well as free forms and documents that are essential to private and hard money lenders.

Know the Risks

Hard money lending can be profitable, but it’s not without danger. Key risks include:

• Default: If the borrower stops paying, you may need to foreclose. Know the laws in your state.
• Market downturns: Falling property values can erode your security if you need to take the asset back.
• Overestimating value: Always get a professional opinion and never rely solely on the borrower’s estimate.
• Poor borrower vetting: If you ignore red flags, you could end up chasing a bad debt.

Success comes from mitigating these risks with solid due diligence, conservative LTVs, and well-written contracts. The more preparation and checks you do at the beginning, the less of a headache you’re likely to get later on.

Understand Foreclosure and Why It Matters

Foreclosure is your legal remedy when a borrower stops paying, and it’s something every private or hard money lender must be prepared for. While no one wants to go down this path, knowing how it work, and planning for it, you can protect your investment.

Foreclosure laws vary by state, so it’s essential to understand the process where you’re lending. In some states, it’s a quick non-judicial foreclosure process; in others, it may take months (or even years) through the courts using a judicial foreclosure process. The key is to structure your loan documents correctly from the start, with a recorded deed of trust or mortgage, clear default clauses, and proper notices.

Foreclosure isn’t just about recovering your money, it’s about having leverage. When borrowers know you’re informed and prepared, they’re far more likely to work with you to resolve issues before it gets that far.

Conclusion

Being a successful private or hard money lender isn’t just about having capital, it’s about making smart decisions, protecting your interests, and building strong relationships. Know your numbers, understand your borrower, and always have a plan B. That’s how pros do it.

Further Reading on a Successful Lender:

• Learn the beauty of hard money: its purpose and benefits.
• Read our articles on foreclosure.

DISCLAIMER: We are not attorneys and we cannot advise you regarding your particular circumstances. You must always obtain competent legal counsel and financial advice. We believe this information to be accurate, but please check with a qualified real estate attorney in your state before making any decision based on this information.