Private Money Lending in Real Estate — A Guide for Capital Partners

Private money lending — sometimes called hard money lending or bridge lending — is one of the most straightforward ways for accredited investors to deploy capital into residential real estate development. You provide capital to a builder or developer, secured against the project, at a fixed interest rate for a defined term. The borrower builds, sells, and repays you with interest. The structure is simple. The due diligence is not.

How Private Lending Works

In a private lending arrangement, you are the lender and the builder-developer is the borrower. The loan is secured by the property — typically a first or second deed of trust recorded against the real estate. If the borrower defaults, your security interest gives you recourse against the asset.

The terms are negotiated directly between you and the borrower. A typical private lending arrangement for residential development includes: a loan amount (typically 60 to 75 percent of the projected after-repair value), an interest rate (typically 8 to 12 percent annually, depending on the deal and market conditions), a term (typically 12 to 24 months), and an origination fee (typically 1 to 3 points).

Interest may be paid monthly during the term or accrued and paid at maturity, depending on the structure. The principal is repaid when the project is sold or refinanced. The entire arrangement is documented in a promissory note and deed of trust, reviewed by counsel for both parties.

Why Builders Use Private Capital

Institutional construction loans are available but come with significant friction — extensive documentation requirements, slow approval timelines, and covenants that can constrain how a project is managed. Private capital is faster, more flexible, and often better aligned with the realities of residential construction.

For a builder-developer with a strong track record and a specific project opportunity in Mount Pleasant, on Daniel Island, or along the Johns Island growth corridor, private capital allows them to move quickly when a deal presents itself — without waiting for a bank's approval process. The cost of private capital is higher than institutional financing, but the speed and flexibility often justify the premium.

The Security Position

The security interest is what distinguishes private lending from equity investment. As a lender, you hold a recorded lien against the property. In a default scenario, you have the right to foreclose and recover your capital from the asset — subject to any senior liens that may exist.

The quality of your security depends on the loan-to-value ratio. A loan at 65 percent of after-repair value means the finished project would need to sell for 35 percent less than projected before your principal is at risk. That buffer is your margin of safety. Lenders who stretch to 90 percent LTV have very little margin for error.

Verify the after-repair value independently before lending. The borrower's projected ARV is an estimate — verify it against comparable sales in the submarket. In the Charleston market, this means understanding the specific neighborhood dynamics: Kiawah Island and Sullivan's Island command significant premiums over West Ashley or Summerville, and those differences matter when you are underwriting your security position.

What to Verify Before You Lend

Before committing capital to a private lending arrangement, verify: the borrower's contractor license and insurance, the title status of the property (no undisclosed liens), the comparable sales analysis supporting the projected ARV, the detailed construction budget and contingency, and the borrower's track record of completing similar projects on budget and on schedule.

Have an attorney review the promissory note and deed of trust before signing. Confirm that the deed of trust is properly recorded with the county — whether the project is in Charleston County, Berkeley County (Summerville), or Dorchester County. Confirm the title insurance policy covers your lender's interest. These are not optional steps — they are the mechanism by which your security interest is protected.

Private Lending vs. Equity — The Trade-Off

Private lending offers predictability and security at the cost of upside. Your return is fixed at the agreed interest rate. If the project sells for significantly more than projected — as has happened consistently in the Kiawah Island, Seabrook Island, and Isle of Palms markets — you receive exactly what was agreed. The borrower captures the excess margin. If the project underperforms, your security interest provides recourse that equity investors do not have.

For capital partners who prioritize capital preservation and predictable returns over maximum upside, private lending is often the appropriate structure. For those who want to participate in the full upside of a well-executed development in Folly Beach, James Island, or the growing Summerville corridor, equity is the right fit. Many experienced capital partners use both structures across different deals.