Private lending is one of the best ways to earn passive income from real estate, without buying property or dealing with tenants. However, before you hand over your hard-earned cash, you must do your homework. This is called private lending due diligence.
As a real estate private lender, asking the right questions can protect your money and give you peace of mind.
Here are the top five questions every private lender should ask before saying yes to a real estate deal.
- What’s the loan-to-value (LTV) ratio?
The LTV compares the borrower’s loan amount to the property’s value.
Why It Matters
The lower the LTV, the less risk for you. If something goes wrong, the value of the property protects your money.
Example:
If the property is worth $200,000 and the borrower wants a $120,000 loan, the LTV is 60%.
Smart tip: Most private lenders prefer deals with LTVs under 70%.
- Is the property in good condition and a good location?
The answer to this question should include follow-ups, such as:
- Does the property need repairs?
- What’s the neighborhood like?
- Is there demand in the area?
Why It Matters
You’re not just lending to a person, you’re borrowing against the property. If the borrower doesn’t pay, the property is your backup.
Smart tip: Ask for photos, a property inspection report, or a Broker Price Opinion.
- Who is the borrower and what’s their plan?
Knowing who you are lending to and how they will use the property can help you evaluate risk.
Ask:
- What’s their experience in real estate?
- Are they buying to flip or rent the property?
- What’s their repayment strategy?
Why It Matters
You need to trust the borrower and understand what they plan to do with the money.
Smart tip: If they have experience and a clear plan, that’s a good sign.
- How will the loan be secured?
Understanding how your investment is backed ensures that it is compatible with your risk tolerance.
Ask:
- Will I get a promissory note?
- Will my name be on the deed of trust or mortgage?
- Will the loan be listed in public records?
Why It Matters
Every private lending deal should come with legal paperwork that protects you in the event of default.
Smart tip: Don’t make real estate investments that are not secured by property. That is how your money will be protected.
- What happens if the borrower stops paying?
No one likes to think about things going wrong, but you need to be prepared.
Ask:
- What are my rights if they stop paying?
- Can I recover the property?
- How long would the process take?
Why It Matters
This type of financial catastrophe can cause confusion. You must know how to navigate the process to ensure you maintain your investment.
Smart tip: Make sure there’s a clear default clause in the loan agreement that protects your money.
Bonus Tip: Don’t Be Afraid to Say No
If something doesn’t feel right, don’t lend. A good deal should make sense on paper, feel safe, and offer fair returns. If the borrower can’t answer your questions or rushes you, that’s a red flag.
Your goal is to make money without stress or surprises.
Final Thoughts
Private lending is a great way to earn monthly income and grow your wealth, without owning real estate. But knowledgeable investors always do their research.
Use this real estate private lender checklist to stay safe.
- Know the numbers.
- Review the property.
- Understand the borrower.
- Secure the loan.
- Know your backup plan.
If you’re ready to become a private lender and want help finding deals that are safe, simple, and profitable, reach out to us. We help new and experienced investors get started the smart way.
