Throughout my career, I have advised clients on every form of capital allocation, from public equities to complex derivatives. But some of the most impactful and strategic financial conversations I have are about the foundation: real estate. And within that world, few topics are as misunderstood as the role of private lenders for the buy and hold investor. The traditional advice is to secure a 30-year fixed-rate mortgage from a large bank and never let it go. While that is an excellent tool, it is not the only one. For the sophisticated investor building a portfolio of rental properties, private lenders can be the catalyst that transforms a slow-growth plan into a powerful wealth-building engine. This strategy is not about desperation; it is about deliberate, calculated acceleration.
A buy and hold private lender is an individual or a small company that provides capital to real estate investors for the acquisition and long-term ownership of income-producing properties. Unlike institutional banks, which are bound by rigid, algorithmic underwriting standards, private lenders primarily underwrite the deal itself and the investor’s track record. They are not assessing you solely on your W-2 income and credit score; they are assessing the property’s cash flow, the after-repair value (ARV), and your proven ability to execute. Their capital is not meant to be a permanent fixture on your balance sheet for decades. Instead, it serves as a strategic bridge—a tool to acquire and stabilize an asset quickly, before refinancing into a long-term, conventional loan. This “loan-to-own” mindset is what separates the professional investor from the amateur.
The Mechanics: How Private Money Works for Buy and Hold
Understanding the structure of a private loan is crucial. The terms are fundamentally different from those of a residential mortgage.
1. The Loan Structure:
Private loans are typically short-term, with terms ranging from 6 months to 3 years. They are interest-only loans, meaning you pay monthly interest but no principal. The entire principal balance is due as a balloon payment at the end of the term.
Example Calculation:
- Loan Principal: \text{\$200,000}
- Interest Rate: 10% annually
- Loan Term: 12 months
Your monthly interest payment is calculated as:
\text{Monthly Payment} = \frac{\text{\$200,000} \times 0.10}{12} = \text{\$1,666.67}At the end of the 12 months, you owe the original \text{\$200,000} principal.
2. The Cost Components:
The cost of private money is higher, and it’s vital to understand what you’re paying for: speed, flexibility, and leverage.
- Interest Rate: Typically between 8% and 12% for a experienced investor with a strong deal.
- Points: This is an upfront fee, expressed as a percentage of the loan amount. 2 points on a \text{\$200,000} loan equals \text{\$200,000} \times 0.02 = \text{\$4,000} due at closing. Points compensate the lender for the work of originating the loan and assuming the risk.
3. The Loan-to-Value (LTV) Ratio:
Private lenders are risk-averse regarding the collateral. They will rarely lend more than 70-80% of the property’s After Repair Value (ARV) or purchase price (whichever is lower). This equity cushion protects them—and by extension, you—from market downturns.
If a property has an ARV of \text{\$300,000}, a private lender might offer:
\text{\$300,000} \times 0.75 = \text{\$225,000}The Strategic Advantages: Why You Would Use Expensive Money
Why would any rational investor choose a 10% loan over a 7% mortgage? The answer lies in strategic advantage, not just cost.
1. Speed and Certainty of Closing:
In a competitive market, a cash offer—or an offer backed by a private lender who can close in 10 days—is infinitely more attractive to a seller than an offer contingent on a 45-day bank approval process. This allows you to secure properties at better prices.
2. The Ability to Finance “Unfinanceable” Properties:
Banks will not lend on a property that is not in habitable condition. Private lenders will. This allows you to acquire distressed properties, use the loan to fund both the purchase and the renovation, and then refinance into a traditional mortgage once the property is stabilized and rented. This is the core of the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat).
3. Leverage and Portfolio Velocity:
This is the most powerful reason. Private money allows you to recycle your capital rapidly. Your own cash is your limiting factor. By using private loans, you can complete a project and then refinance out, pulling all or most of your original capital back out to use on the next deal.
Illustrative Example of the BRRRR Strategy with a Private Lender:
- You Find a Deal: You identify a distressed property for sale at \text{\$180,000}. It needs \text{\$40,000} in repairs. The After Repair Value (ARV) is estimated at \text{\$280,000}.
- Secure Private Loan: A private lender agrees to lend 75% of ARV.
\text{Loan Amount} = \text{\$280,000} \times 0.75 = \text{\$210,000} - Acquire and Rehab: You use the \text{\$210,000} loan to buy the property for \text{\$180,000} and fund the \text{\$30,000} in renovations (holding some back for carrying costs).
- Rent: You complete the rehab and rent the property for \text{\$2,000}/month.
- Refinance: After a six-month seasoning period required by most banks, you refinance with a conventional lender. They appraise it at \text{\$280,000} and offer a 75% loan-to-value mortgage at a 7% interest rate.
\text{New Mortgage} = \text{\$280,000} \times 0.75 = \text{\$210,000} - Payoff and Repeat: You use the \text{\$210,000} from the new bank loan to pay off the private lender in full. You now own the property free and clear of the expensive private loan, with a tenant paying the new, lower mortgage. Critically, you have zero of your own capital left in the deal. Your initial capital was used only for the down payment to the private lender (if any) and points. All of it was returned to you during the refinance. You now have a cash-flowing asset and all your capital back to repeat the process.
The Risks and How to Mitigate Them: An Accountant’s View
The risks of using private money are significant and must be managed ruthlessly.
1. Carry Cost Risk: The high interest rate means your holding costs are substantial. Every day of renovation delay is expensive.
- Mitigation: Have a detailed, realistic project timeline and budget. Include a contingency fund of 10-15% for unexpected costs.
2. Refinance Risk: The entire strategy hinges on your ability to refinance out of the private loan. If the property doesn’t appraise for the expected ARV, or if interest rates have spiked, you could be stuck with a balloon payment you can’t pay.
- Mitigation: Be conservative in your ARV estimates. Underwrite the deal based on a 70% LTV refinance, not 75%. Ensure the property’s cash flow after refinancing will still be strongly positive.
3. Partnership Risk: Your relationship with your private lender is everything. If they suddenly need their capital back or become difficult, it can jeopardize your project.
- Mitigation: Treat them like a valuable business partner. Communicate proactively. Provide updates before they ask. Choose lenders who are professional and understand the real estate business, not just those seeking the highest return.
Finding and Vetting Private Lenders
You don’t find private lenders at a bank branch. You find them through networking—real estate investment clubs, attorney referrals, CPAs, and even family offices. The best lenders are often successful individuals with self-directed IRAs or 401(k)s looking for a better return than the stock market can provide, secured by hard asset collateral.
When you approach them, be professional. Have a detailed package ready: the property analysis, comps for the ARV, your project budget and timeline, your experience, and a clear exit strategy (the refinance plan). Show them you are a safe pair of hands for their capital.
Using buy and hold private lenders is an advanced strategy, but it is not reckless. It is a calculated use of expensive, short-term capital to acquire and control valuable long-term assets. It is the financial leverage that allows disciplined investors to build portfolios at an exponential rate, turning their expertise into genuine, lasting wealth. It is not a path for the faint of heart, but for those who master it, it is the most powerful tool in the real estate investor’s arsenal.
