How Does Private Lending Work in Real Estate?

What borrowers and private lenders should understand before money changes hands

Natalie Pilkinton

By Natalie Pilkinton, REALTOR® & Real Estate Investor · Updated

Short answer

Private lending is when an individual or small company — not a bank — lends money to a real estate investor, secured by the property. Investors use it to buy and rehab properties quickly, then pay it off by selling or refinancing into a long-term loan.

In Texas the loan is usually documented with a promissory note and a recorded deed of trust. Both sides should use a Texas real estate attorney, because usury, licensing and homestead rules all apply.

What private money is used for

  • Buying a distressed property fast, often for cash, before a bank would close.
  • Funding the rehab on a flip or a BRRRR project.
  • Bridging the gap until the property is seasoned for a long-term refinance, such as a DSCR loan.

How a private loan is usually documented

  • A promissory note setting out the amount, rate, term, payments and default terms.
  • A deed of trust recorded in the county, giving the lender a lien on the property.
  • A lender's title insurance policy confirming the lien position, usually first lien.
  • Hazard insurance naming the lender, and a clear draw schedule if rehab funds are held back.
  • A loan amount sized to a conservative share of the property's value, so there's a cushion if the borrower can't finish.

Risks to understand

For lenders:

  • The borrower defaults or the rehab stalls, and the property is worth less than expected.
  • Usury: Texas caps the interest that can be charged, and how the cap is calculated is technical — the Texas Supreme Court addressed it again in 2025.
  • Licensing and consumer rules can apply depending on the borrower and how the property is used.
  • Texas homestead protections strictly limit loans against a borrower's own home; private loans should be on investment property.
  • Pooling money from several people into one fund can turn the arrangement into a securities offering.

Questions to ask before you lend or borrow

  • What is the exit — a sale, or a refinance with a lender who has already reviewed the deal?
  • What is the as-is value and the after-repair value, and who determined them?
  • What happens if the rehab runs 60 days late or 20% over budget?
  • Who holds the rehab funds, and what triggers each draw?
  • Has a Texas real estate attorney drafted the note and deed of trust?

Who Natalie works with on financing

For the long-term loan you refinance into, including DSCR loans, Natalie works with Brian Lupton at HomeRock Mortgage. To hear how short-term hard money works from a Houston lender's side, listen to Natalie's conversation with Eddie Gant of Jet Lending on podcast episode 56.

  • Mortgage broker

    HomeRock Mortgage

    Brian Lupton, Mortgage Loan Originator

    Long-term financing for investors and homebuyers, including DSCR loans for rentals and refinances out of short-term debt. Brian co-presents Natalie's Home Buyer Masterclass.

    homerockmortgage.com

    NMLS #2035744 · Company NMLS #1691956

HomeRock Mortgage is part of the HomeRock Group, the same group of companies as HomeRock Realty, Natalie's brokerage. You're free to choose any lender, and you should compare terms. Loan programs, rates and approval are set by the lender.

Frequently asked questions

What's the difference between private money and hard money?

Both are non-bank loans secured by real estate. "Hard money" usually means a company that lends to investors as a business, with set rates and points. "Private money" often means an individual lender, with terms negotiated deal by deal.

Is private lending legal in Texas?

Yes, but it's regulated. Texas usury law caps interest, and licensing and homestead rules can apply. Have a Texas real estate attorney draft and review the loan documents.

How do private lenders protect themselves?

With a recorded deed of trust in first-lien position, a lender's title policy, insurance naming the lender, a conservative loan-to-value and rehab funds released in draws as work is completed.

Does Natalie offer private lending?

No. For long-term and DSCR financing, Natalie works with Brian Lupton at HomeRock Mortgage. This page is education only and isn't an offer to lend or invest. To talk through a specific deal, book a strategy session.

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