Private Lending Best Practices

Last updated June 15, 2025

Private lending is simple at its core: one person lends money, another person borrows it. But doing it well means following proven steps that protect both sides.

Know Your Numbers First

Build Your Buy Box

A buy box is just your list of rules for what deals you'll do. Write these down before you look at any deals:

  • How much can you lend? Know your limits.
  • What interest rate do you need? Be clear about your minimum.
  • How long will you lend for? 6 months? 2 years? Decide first.
  • What collateral do you accept? Real estate? Business assets? Cash flow?
  • Where will you lend? Your city? Your state? Anywhere?
Why this matters: When someone asks for money, you can quickly say yes or no. No wasted time. No bad deals that "seemed okay at the time."

Send Money Safely

Wire Transfer Security

Rule #1: Only send money to title companies. No exceptions.

Before you wire:

  • Call the title company directly - Use a number you find yourself
  • Verify wire instructions by phone - Never trust email alone
  • Double-check account numbers - One wrong digit loses everything
  • Ask about their fraud prevention - Good companies have procedures
Wire fraud is real: Scammers hack emails and send fake wire instructions. If you wire to the wrong account, your money is gone forever. Always verify by phone.

Check Everything Twice

Due Diligence Made Simple

Due diligence means checking if what they told you is true. Here's how:

For the Person:

  • Look them up on DealCred to see past lending history
  • Check their ID (yes, really)
  • Search their name online
  • Call their references
  • Look at their credit (if they'll share it)

For the Deal:

  • Get a title search (title company checks for hidden liens)
  • Confirm your lien position (1st? 2nd? 3rd?)
  • See the collateral yourself if you can
  • Get it valued by someone independent
  • Review the title report carefully
  • Understand their plan to pay you back

Write It All Down

Documents You Need

Good fences make good neighbors. Good documents make good loans.

Critical: A promissory note alone is just an IOU. Without a recorded mortgage or deed of trust, you're unsecured. Always record your security documents immediately.

Essential Document Checklist

  • ☐Promissory note (the loan terms)
  • ☐Mortgage or deed of trust (your security - MUST be recorded)
  • ☐Title search showing your position (1st, 2nd, etc.)
  • ☐Lender's title insurance policy
  • ☐Hazard insurance (with you as additional insured)
  • ☐Personal guarantee (for any risky loan)

Get a real estate lawyer to draft these. Not the title company. Not a paralegal. A lawyer who knows lending in your state.

Common Document Mistakes That Cost Money

  • Not recording immediately - Record the same day you fund
  • Wrong legal description - Double-check property details
  • Missing notarization - Many states require it
  • Thinking a JV agreement creates a lien - It doesn't
  • No title insurance - Especially dangerous in 2nd position

Structure Smart Deals

Key Numbers That Matter

Loan-to-Value (LTV): How much you lend versus what the collateral is worth.

  • Lend $70,000 on a $100,000 property = 70% LTV
  • Lower is safer. Most lenders stay under 75%.

Debt Service Coverage Ratio (DSCR): Can they afford the payments?

  • Their income ÷ Your payment = DSCR
  • Want at least 1.25 (they make 25% more than they need)

Exit Strategy: How do they pay you back?

  • Refinancing with a bank or other lender?
  • Selling the property?
  • Cash from their business?
  • Another investor taking you out?
Rule of thumb: They should have two ways to pay you back. If plan A fails, what's plan B?

Stay in Touch

Good Communication Prevents Problems

Before the loan:

  • Be clear about your terms
  • Answer questions fast
  • Set expectations early

During the loan:

  • Check in monthly (a quick text works)
  • Visit the property/business quarterly
  • Know about problems before they're big

If payments are late:

  • Call within 3 days
  • Listen first, talk second
  • Get the new plan in writing

Know the Rules

Stay Legal

Each state has different rules. Learn yours:

  • Usury laws: Maximum interest you can charge (some states are strict)
  • Licensing: Some states require lender licenses
  • Foreclosure rules: Judicial vs non-judicial states matter
  • Consumer protection: Extra rules for personal homes
Warning: Some states (like Michigan, New Jersey, Pennsylvania) will cancel your lien and fine you for charging too much interest. Know your state's cap.

When in doubt, ask a lawyer who knows lending in your state.

Build Good Relationships

The best lenders get repeat business. Here's how:

  • Be fair - Good deals work for both sides
  • Be fast - Time kills deals
  • Be clear - No surprises, ever
  • Be helpful - Share knowledge when you can

Your reputation travels fast in private lending. Make it a good one.

Common Mistakes to Avoid

  • Lending without recording a mortgage/deed of trust - You're just unsecured
  • Trusting title companies to draft documents - They're not lawyers
  • Thinking a JV agreement gives you a lien - It makes you a partner, not a lender
  • Not getting title insurance in 2nd position - You could be wiped out
  • Recording documents late - Someone else might jump ahead
  • Lending to friends without documents - Friendship doesn't replace paperwork
  • Skipping due diligence to close fast - Speed kills good judgment
  • Ignoring your gut feeling - If it feels wrong, it probably is

Keep Your Documents Safe

After closing:

  • Keep original signed documents - Scans aren't enough in court
  • Store them safely - Fireproof safe or safety deposit box
  • Track recording numbers - Proof your lien exists
  • Keep insurance current - Set calendar reminders

Ready to Make Smarter Lending Decisions?

Join DealCred to see verified track records of borrowers and lenders.
Make better decisions with real reviews from real deals.

Get Started Free