How to Structure a Private Lending Deal (Step-by-Step for Real Estate Investors)

Private money lending has quietly become one of the most popular ways for individual investors to deploy capital into real estate. But here's what most people miss: the interest rate on a deal matters far less than how the deal is structured. A poorly structured private loan can turn a promising investment into a legal headache, a cash-flow drain, or an outright loss-regardless of the rate.

At Third Act Retirement Planning, we work with clients who often come into sudden wealth through an inheritance, business sale, or settlement. Many are drawn to private lending for its yield and tangible collateral. Our role as a fee-based fiduciary advisor is to help them evaluate these opportunities within the full picture of retirement, tax, and legacy planning.

So what exactly is private money lending? In short, it's short term loans secured by real estate, funded by individual investors or private funds instead of traditional banks. Private lenders can approve loans in 24 to 48 hours, focus on property value rather than credit scores, and offer more flexible terms than banks. The tradeoff: higher rates, shorter timelines, and the need for careful deal structure.

This article walks through every key component of how to structure a private lending deal-from analyzing the property and setting loan terms to legal documentation, risk management, and fitting it all into a broader wealth plan grounded in biblical stewardship. Whether you're funding a fix-and-flip in Atlanta, bridging to long-term DSCR financing on a rental property, or providing capital from an inheritance to a trusted operator, these principles apply.

How Private Money Lending Works in Real Estate

Private money loans are short-term, real-estate-secured debt provided by individuals or private funds instead of traditional lenders. Think of them as bridge loans that fill the gap where conventional financing is too slow, too rigid, or simply unavailable.

Here's the basic flow of how private money lending works:

1. The borrower identifies a property and presents a project plan with acquisition cost, rehab budget, and exit strategy.

2. The lender underwrites the deal-reviewing comps, title, permits, and borrower experience.

3. At closing, the lender wires funds to a closing attorney or title company. The borrower executes a promissory note and mortgage or deed of trust. The lien is recorded.

4. During the loan term, the borrower typically makes monthly interest payments. If rehab is involved, funds may be released in draws tied to inspections.

5. At maturity, the borrower exits by selling the property or refinancing into long term financing.

The key parties include private lenders (often high-net-worth individuals or families deploying their own capital), real estate investors serving as borrowers, a closing attorney or title company, and sometimes a third-party loan servicer.

Most private money loans have terms of 6 to 12 months, with interest-only payments and a balloon payment of principal at maturity. Private loans are typically asset-based, meaning the lender relies heavily on the underlying property as collateral-not the borrower's W-2 or credit score. This makes private money lending ideal for distressed properties needing repairs, value-add projects, and situations where traditional bank loans simply won't close fast enough.

Within the capital stack, private debt sits alongside borrower equity, possible partner equity, and sometimes mezzanine financing. Understanding where your money sits in that stack is critical before you write a check.

Core Components of a Well-Structured Private Lending Deal

Before signing anything, both lender and borrower should define every major deal term in writing. Structuring a private lending deal requires balancing risk and reward through carefully calibrated terms. Here are the key components to nail down:

• Purchase price – What the borrower is paying for the property.

• Rehab or construction budget – Hard costs (materials, labor) and soft costs (permits, insurance).

• Total project cost – The borrower’s funding needs for the project: acquisition + rehab + holding costs + financing costs + contingency.

• Loan amount – What the lender advances at closing and through draws.

• Loan-to-Value (LTV) – Loan divided by property value (current or after-repair).

• Loan-to-Cost (LTC) – Loan divided by total project cost.

• Interest rate – Annualized, typically fixed.

• Points and fees – Origination fees charged at closing (usually 1–3 points).

• Term length – Duration until maturity, plus any extension options.

• Payment structure – Interest-only monthly, deferred, or amortizing.

• Collateral – First lien on the residential property (or other real estate).

• Exit strategy – Sale, refinance, or rental conversion.

Clear written terms protect both sides and reduce friction-especially when the private loan involves a friend or family member after an inheritance. Private money lenders often require a written plan for fund usage, and a well-structured deal can attract funding within days.

All loan terms should be documented legally including promissory notes and loan agreements. In today's market conditions-with higher rates, elevated construction costs, and slower days-on-market in many areas-aligning terms with 2025–2026 realities rather than pre-2020 assumptions is essential. Always have a real estate attorney draft or review the essential documents before closing.

Analyzing the Deal: Purchase Price, ARV, and Total Project Cost

Every private lending deal must start with an objective analysis of the underlying real estate. No deal structure, however elegant, can save you from a bad property or inflated numbers.

Purchase price. Use recent comparable sales (ideally within the last 90 days in the local market), not just a wholesaler's pro forma. Conduct a physical inspection. Get contractor estimates in writing for all anticipated repairs and renovation costs.

After Repair Value (ARV). This is the estimated sale price after rehab. Disciplined real estate investors calculate ARV using 3–5 comps of similar renovated properties, adjusting for square footage, lot size, condition, and finishes. Conservative assumptions matter: reduce your ARV estimate by 5–10% to account for market softness or buyer resistance.

Total project budget. Break it into:

Private money loans typically cover 65%–75% of the ARV, so these numbers determine the maximum safe loan amount and whether the deal leaves enough profit potential for both the investor and lender. Effective private lending requires assessing the borrower's financial metrics and exit strategies before committing capital.

Setting Loan Amount, LTV, and LTC

Loan sizing is the backbone of risk management for any private money lending business. Get it wrong and even a strong property won't protect the lender's capital.

Loan-to-Value (LTV) is the loan amount divided by the property's value. Loan-to-Value ratios limit the maximum loan size relative to the property's appraised value. For example, 65% LTV on a property with an ARV of $400,000 means a maximum loan of $260,000.

Loan-to-Cost (LTC) is the loan amount divided by total project cost. It tells you how much skin the borrower has in the game.

Typical ranges for most private lenders in 2025–2026:

• Heavy rehab or construction: 60–70% of ARV; LTC capped around 65–75%

• Light rehab or stabilized rentals: up to 75–80% of purchase price

Private lenders may require a down payment and collateral to ensure borrower commitment. Loan-to-value ratios for private money loans are typically 65% to 75%.

When a lender funds rehab, the money usually isn't released all at once. Instead, draw schedules tie disbursements to milestone inspections-reducing the risk of funds being misused or projects stalling. For purchase-only deals, a single disbursement at closing is standard.

Conservative LTV and LTC leave room for market shifts, cost overruns, and slower sales. If you're lending at 90% LTC and ARV drops 5%, your equity cushion evaporates. Staying below those ceilings is how you reduce risk without sacrificing reasonable returns.

Designing Interest Rates, Points, and Fee Structures

Private money loans are priced higher than traditional financing because they offer speed, flexibility, and accept more perceived risk. Interest rates for private money loans typically range from 8% to 20%, depending on deal strength, borrower experience, leverage, and local market dynamics.

In Q4 2025, average private money rates in Florida came in around 10.11% with an average LTV of roughly 62%. Interest rates for private loans are usually higher than conventional loans to compensate for higher risk-and this is expected by both sides.

Origination fees (points) of 1–3% of the loan amount are standard at closing. Here's a simple comparison on a $300,000 loan with a 9-month term:

The tradeoff: more money upfront via points improves lender yield and cash flow; higher interest benefits lenders on longer holds but costs the borrower more over time.

Other fees may include underwriting, document prep, inspections, and extension fees. Prepayment penalties help guarantee a minimum yield for the lender, though they're less common in short-term deals. Keep the deal structure transparent and simple-hidden fees breed disputes and erode trust.

Choosing Term Length, Payment Structure, and Exit Strategy

A deal can have a great property and solid borrower but still fail if the loan term and exit strategy don't align with reality. Private loans typically last from 6 to 24 months as short-term bridge loans, with most private money loans falling in the 6-to-12-month range.

Common term options:

• 6–9 months: Light cosmetic rehab, quick flip

• 12 months: Standard rehab or value-add

• 18–24 months: Heavier construction, entitlement work, or development

Payment structure matters for both sides. Most deals use interest-only monthly payments-the borrower pays interest each month, with the full principal due at maturity. Deferred interest (accrued and paid at payoff) reduces borrower cash flow burden but increases lender risk if the exit doesn't happen on schedule. Amortizing structures are rare for typically short term deals but common when transitioning to a rental hold.

Exit strategies for real estate investments generally fall into three categories:

1. Sell after rehab (fix-and-flip) – the most common for short-term private loans

2. Refinance into a long-term DSCR loan – ideal for investors converting a distressed property into a rental property

3. Hold as a rental – the BRRRR strategy (buy-rehab-rent-refinance-repeat)

Every private loan should have a realistic repayment plan detailing the exit strategy. Stress-test it: What if the sale takes three extra months? What if the ARV comes in 5% lower? Build extension options with clearly defined fees into the repayment schedule so neither party is caught off guard.

Legal Documentation, Collateral, and Personal Guarantees

Private money lending is a legal contract, not a handshake-even when lending to a family member or ministry partner. Legal documentation in private lending includes several key documents to secure the lender's interest.

Essential documents include:

• Promissory note – The borrower's legal promise to repay, specifying loan amount, interest rate, payment schedule, maturity date, and default provisions.

• Mortgage or deed of trust – The instrument that pledges the property as collateral and creates the lien. In Georgia, this is called a "security deed." The type and foreclosure process vary by state.

• Personal guarantee – If the borrower is an LLC or trust, the lender often requires principals to guarantee repayment personally.

• Assignment of rents / security agreements – Additional collateral layers, especially for rental or mixed-use properties.

Collateral can include assets such as real estate, business equipment, and personal guarantees. First-lien position gives the lender the strongest asset protection in a default or foreclosure. Second-lien positions are riskier-if the first lender forecloses, the second may recover little or nothing.

Default provisions clarify payment defaults and remedies available to the lender. Protective covenants help to monitor the borrower's financial condition and ensure compliance with the loan agreement.

Involve a real estate attorney licensed in the property's state to draft or review documents and ensure compliance with local law. Usury laws and interest rate limits vary by jurisdiction and must be adhered to in private lending. For those exploring estate planning for new millionaires, clear documentation also supports biblical principles of clarity, honesty, and honoring commitments.

Due Diligence and Risk Management for Both Sides

This is the risk-control heart of how to structure a private lending deal. For clients managing sudden wealth, sloppy due diligence is one of the fastest ways to lose more money than you ever expected.

Lender due diligence checklist:

• Verify borrower experience and track record on similar projects

• Review the borrower's business plan and financial capacity

• Confirm permits, zoning, and legal use of the property

• Inspect the property for structural or environmental issues

• Validate comps, ARV assumptions, and contractor estimates

• Check title for existing liens, judgments, or encumbrances

• Confirm entity authority if borrower is an LLC or trust

Borrower due diligence checklist:

• Verify lender reputation-seek a reliable private money lender with transparent terms

• Review all fees, default conditions, and extension policies

• Understand personal guarantee exposure

• Confirm lender's ability to fund draws on time

Networking is crucial for finding private money lenders with solid reputations. Private lending companies vary widely, and borrowers face higher risks due to less strict qualification guidelines. Since private lending is less regulated than traditional bank loans, both sides must compensate with their own thoroughness.

Common risks include market downturns, contractor failures, and cost overruns. Mitigate them with conservative underwriting, adequate reserves, proper insurance, and realistic timelines. At Third Act Retirement Planning, we help clients weigh private money lending exposure within a diversified portfolio, avoiding concentration risk in one operator, city, or property type.

Example: Structuring a Private Lending Deal on a Single-Family Flip in 2026

Let's walk through a concrete case. Suppose a client who recently sold a business in 2025 wants to deploy a portion of their proceeds into private lending, where pooled investor capital can support more deals. An experienced operator presents a single-family flip in Cobb County, GA, in April 2026.

Deal numbers:

Proposed loan terms:

• Loan amount: $230,750 (65% of ARV)

• LTC: ~73.7%

• Interest rate: 10% (interest-only monthly)

• Points: 2 ($4,615 at closing)

• Loan term: 9 months with a 1-month extension at fee

• Exit strategy: Sell after rehab

Lender return (9-month scenario): Principal $230,750 + interest ~$17,306 + points $4,615 = approximately $252,671 total. Annualized return for the lender: roughly 11.5%.

Stress test: If the sale takes 12 months instead of 9 and the property value drops 5%, net sale proceeds after 7% selling costs come to approximately $313,882. The lender still recovers principal and interest. The borrower's profit shrinks significantly but remains positive. The structure protected the lender through conservative LTV, a first-lien security deed, draw inspections, and clear extension fees.

For a client with $1 million in sudden wealth, funding this single deal at ~$250,000 represents meaningful but manageable exposure. The prudent move: spread capital across multiple investments, retain liquidity, and coordinate with tax planning. One deal is a tool-not a strategy.

Fitting Private Money Lending into Your Long-Term Wealth, Tax, and Legacy Plan

Private lending is one viable option among many for those stewarding significant wealth. It belongs alongside diversified public markets, tax-efficient retirement accounts, and charitable strategies-not as a standalone play.

Interest income from private loans is taxed as ordinary income, not long-term capital gains. For high-bracket investors approaching retirement, this distinction matters. Coordinate with a CPA and review tax strategies for high net worth individuals to understand the full impact on your personal finance picture.

Many investors use LLCs-sometimes within trusts-to hold private loan notes for liability and estate planning purposes. This adds asset protection and simplifies legacy transfer, but specifics require coordination with an attorney and CPA. If you've recently come into new properties or wealth through inheritance, understanding how to minimize taxes on inheritance is equally important.

At Third Act Retirement Planning, we integrate private lending decisions with retirement income planning, inflation protection, healthcare and long-term care planning, and biblical generosity goals. We help clients build wealth purposefully-not just accumulate yield. Every private loan should be part of a written financial plan documenting objectives, risk limits, and how proceeds support your financial goals and legacy.

The real estate world offers real opportunity for individual investors willing to do the work. But the money you deploy into a hard money loan or private note should serve your broader purpose, not distract from it.

Conclusion: Next Steps Before You Fund or Borrow on Your Next Deal

Structuring a private lending deal well comes down to a handful of disciplines:

• Analyze the deal conservatively: defensible purchase price, realistic ARV, and a total project cost that includes contingency.

• Size the loan with margin: conservative LTV and LTC protect against market conditions you can't predict.

• Document everything legally: promissory notes, liens, personal guarantees, and protective covenants eliminate ambiguity.

• Stress-test the exit strategy: assume delays, lower values, and tighter refinancing before you commit.

Whether you're a lender evaluating your next deal or a borrower preparing to find borrowers for your project, slow down long enough to perform due diligence. Most private money lenders and hard money lenders who succeed over time share one trait: they never skip the homework.

If you've experienced sudden wealth-through inheritance, a business sale, or settlement-and you're exploring whether private money lending belongs in your broader retirement and legacy strategy, we invite you to schedule a discovery call with Third Act Retirement Planning. We'll help you evaluate how real estate investing fits within a diversified, purpose-driven plan.

Wise stewardship, integrity, and clear communication should guide every private lending relationship. Your capital deserves the same care you'd want for your family's future-because that's exactly what it is.