Raise Private Money — The Quick Read: Raising private money means borrowing straight from a person instead of a bank. You usually document this with a note. The note is secured by a mortgage or deed of trust against the property. Here’s the catch: if a lender’s return depends on your management, or shifts from fixed interest into a share of profits, the deal can become a security under federal law. That changes who you can raise money from. Most sponsors who pool money from more than a few people use a Regulation D exemption — usually Rule 506(b) or 506(c). Get the paperwork right, and private money becomes the bridge that gets a property stabilized and ready for a DSCR refinance.
Key Takeaways
- One lender, one fixed-rate note, one borrower. That’s usually just debt, not a security.
- Add profit-sharing, multiple passive investors, or a return tied to your management, and the Howey Test can turn the note into a security.
- Rule 506(b) lets investors self-certify as accredited, plus up to 35 non-accredited investors — but no public advertising. Rule 506(c) allows advertising, but every investor must be independently verified.
- States set interest rate caps, not the federal government, and most states count fees toward the cap.
- Self-directed IRA money can fund a private loan, but the account owner can’t personally guarantee it or lend to close family.
What Counts as Private Money?
Private money is money you borrow directly from a person or a small group — not a bank, an agency lender, or a non-QM shop. You usually secure it as debt against the property itself. That’s the whole category. A few different structures live inside it, and confusing them costs investors real money.
What this loan actually costs to carry in your market.
Hard money is sized against the project and priced by time. Enter the deal and see how much the program will lend, the cash required at closing, the carry while you hold it, and what is left at the exit.
Leverage tiers on the current program: up to 85% of project cost with fewer than two completed projects, 90% with two or more, 93% with five or more — every tier capped at 75% of after-repair value. Loan amounts up to $5,000,000, larger by exception; terms of 6 to 18 months, interest-only, no prepayment penalty. The rehab portion funds in draws against completed work, not at closing.
Program parameters shown update from Lendmire’s centralized guideline source. Rate, points, and months are editable assumptions, not quoted terms.
Cost cap sets the loan · positive spread
Illustrative estimate only — not a quote, Loan Estimate, approval, or commitment to lend. Rate, points, and months are editable assumptions. Hard money is business-purpose financing for real estate investors, not a consumer mortgage. Leverage on the current program tops out at 93% of project cost for investors with a documented track record, capped at 75% of after-repair value, with rehab funding up to 100% of the documented budget released in draws; actual terms vary by lender, borrower experience, property, and exit. Lendmire is a mortgage broker, not a lender.
Hard money is a cousin, not a twin. It comes from a professional lender or fund that underwrites almost entirely against the asset — property value, equity position, exit strategy. Private money, in the classic sense, comes from a person weighing both the property and your track record. Equity crowdfunding works differently: investors buy a stake in the deal’s upside through an online portal, not a fixed debt payoff.
A DSCR loan is a fourth, separate thing. It’s an investor mortgage that qualifies mainly on the property’s rental income covering the payment, subject to lender guidelines — not on your personal income documents. Lendmire’s complete DSCR loans guide covers that program end to end. This article covers the private capital that usually comes before the DSCR loan.
Key Terms Defined
Promissory note — the document where a borrower promises to repay a lender. It spells out the amount, the term, and how repayment works.
Security — under the Howey Test, this means investing money and expecting profit that depends mainly on someone else’s work.
Accredited investor — someone who earned over $200,000 alone (or $300,000 with a spouse) in each of the past two years, and reasonably expects the same this year. Or someone who passes a separate net-worth test.
Regulation D — the SEC framework, mainly Rule 506. It lets issuers raise money through unregistered offerings, skipping a full public securities filing.
Private Placement Memorandum (PPM) — the disclosure document a sponsor gives investors. It describes the deal, the risks, the fees, and the terms, and pairs with a subscription agreement.
Self-directed IRA (SDIRA) — a retirement account structure. The account itself, not its owner personally, holds and lends against real estate.
Is It a Security? The Test That Decides Everything
This one question decides whether you can raise money from two people or two hundred. Courts apply the Howey Test: was money invested expecting profit that depends mainly on someone else’s work?
A straight, fixed-interest loan between two people, at arm’s length, usually isn’t a security. Swap that fixed rate for a profit share, or a piece of the property, and the analysis shifts fast. One widely cited case involved a note where the lender’s return was tied to a percentage of sale profits — courts scrutinized that structure closely, per KKOS Lawyers. Loan sizes on the current program run up to $5,000,000, with larger amounts considered by exception.
Here’s the rule of thumb. Fewer people, plus a return that’s fixed and doesn’t depend on your management, looks like ordinary debt. More passive investors and more profit-sharing looks like a security — and that triggers everything below.
The Reg D Exemptions Most Sponsors Use
Once a raise crosses into security territory, most sponsors skip SEC registration and use a Regulation D exemption instead. Rule 506 covers most of those deals, and it splits into two very different paths.
Rule 506(b) lets a sponsor sell to an unlimited number of accredited investors, plus up to 35 non-accredited investors. It relies on the investor’s own word — a “reasonable belief” standard — that they qualify. The tradeoff: no public solicitation. Post the deal on social media or pitch it from a stage, and you can blow the exemption.
Rule 506(c) flips that trade. Public advertising is allowed, but every investor must be independently and verifiably confirmed as accredited — through personal-income documents, bank letters, or third-party verification. That verification burden is exactly why 506(c) offerings stay rare compared to 506(b), according to Akin Gump. If you’re raising quietly from a known circle of past lenders and contacts, 506(b) is almost always the more practical fit.
Regulation Crowdfunding is a third option for smaller, scaled raises. An issuer can raise up to $5 million in a 12-month period through a registered online portal, and non-accredited investors face a cap on how much they can put in across all Reg CF offerings combined. This option suits multi-investor sponsor raises, not a one-off rehab loan from three known lenders.
How Raising Private Money Actually Works
The process runs the same whether the raise ends up classified as a security or stays plain debt — only the paperwork changes.
1. Decide the structure. Fixed interest to a known lender or two is the simplest path, and it usually stays out of securities territory. Profit-sharing or pooled passive capital pushes you toward security treatment.
2. Pick the exemption, if needed. Most multi-investor real estate raises land on 506(b) — quiet, self-certified, with no public pitch.
3. Draft the loan documents. Every private loan runs on the same core paper: a promissory note, and a mortgage or deed of trust that gives the lender a recorded lien position — first if it’s the only debt on the property, subordinate if a hard money first mortgage sits ahead of it, per FortuneBuilders. If the deal counts as a security, a PPM and subscription agreement wrap around that same note.
4. Fund and record. Money moves, documents get signed, and the security instrument gets recorded at the county. This step protects lien position and puts future lenders on notice.
5. File notice, if required. Reg D issuers file Form D with the SEC. States can’t force full registration on a 506(b) deal, but many still want a notice filing and a fee.
Where the Money Comes From
| Source | Typical Use Case | General Risk Note |
|---|---|---|
| Individual private lenders | Known relationships, single-property deals | Documentation quality decides everything at refinance |
| Self-directed IRA/401(k) | Passive lender wants tax-advantaged income | Owner can’t guarantee the loan or lend to close family |
| Home equity (primary residence) | Funding a down payment or rehab budget | Puts the investor’s own home behind the investment |
| Reg CF crowdfunding portal | Multi-investor, scaled sponsor raises | $5M/12-month cap; heavier compliance overhead |
| Hard money / private fund | Acquisition and rehab-stage bridge financing | Asset-based, terms set by property and exit, not relationship |
Self-directed IRA capital deserves its own callout. An IRA can lend money out and earn passive, tax-advantaged interest, but the IRS treats the account as legally separate from its owner. A loan issued to an IRA must be secured by the asset itself, never by the owner’s personal guarantee. The owner also can’t lend IRA money to a spouse, parent, or child — those are disqualified persons under IRS rules. A sibling isn’t automatically on that list, a distinction many investors miss. Tax treatment for any of these structures depends on how you use the funds and how you hold the property. Investors should keep clear records and talk with a qualified tax professional before relying on any deduction.
Hard money sits at the more institutional end of this table. Across the wholesale network Lendmire places files through, fix-and-flip leverage on the current program runs up to 93% of project cost for investors with five or more completed projects and up to 90% with two or more, with every tier capped at 75% of after-repair value; bridge purchases without rehab run up to 80% of purchase price, and cash-out or refinance files top out at 65% of value. Fix-and-flip files often add up to 100% of the rehab budget on top of that purchase number — a rehab-cost figure, not additional purchase leverage. Terms are short by design — 6 to 18 months on the current program, interest-only, with no prepayment penalty — and investors who need longer runway refinance into a DSCR loan once the property qualifies. Underwriting stays asset-based — it looks at property value, equity, and exit strategy — though credit minimums, reserves, and eligible collateral types vary by lender, property, and experience.
Where the Rules Bend
Here’s the general rule: small, fixed-interest, single-lender loans stay out of securities territory. But that rule breaks in a few predictable spots.
A single lender can still trigger security treatment. Howey doesn’t require multiple investors. One lender with a profit-share return, instead of fixed interest, can still land the deal squarely in security territory.
Fees can turn a legal rate into an illegal one. States set interest rate caps, not the federal government, and the caps vary sharply — California generally holds simple interest on non-exempt private loans to the single digits annually, while a jurisdiction like the District of Columbia permits a noticeably higher cap, per Coleman & Horowitz. Most states count origination fees, exit fees, and extension fees toward that cap, so a rate that looks fine on paper can become usurious once you add fees. Choosing another state’s law to govern the note doesn’t fix this either — that choice typically covers the loan document only, not the mortgage or deed of trust, which stays governed by the law of the state where the property sits.
Advertising changes the exemption, full stop. A sponsor who quietly raises under 506(b) and then posts the deal publicly may have just disqualified that exemption. Only 506(c) permits public solicitation, and it comes with the verification burden most smaller sponsors would rather avoid.
Civil disputes can turn criminal. When a private lending relationship sours — a lender feels misled, or a borrower goes quiet on repayment — the fallout doesn’t always stay civil. In one instructive case, a lender’s own investigative work into a stalled repayment led to a criminal case over how the money had been raised and represented in the first place.
From Private Money to Permanent Financing
Private money is almost never the end of the road. It funds an off-market acquisition a bank won’t touch. It covers a rehab budget before there’s a lease in place. Or it bridges the gap before permanent financing lands. The exit for most of these deals is a refinance, and that’s exactly where documentation quality from the drafting step above stops being a formality and starts deciding whether the payoff closes cleanly.
A DSCR loan is the most common landing spot. It qualifies mainly on property-level rental income covering the payment, subject to lender guidelines — not on the borrower’s traditional personal-income documentation. It’s a business-purpose loan on non-owner-occupied property, and lenders review it differently than a standard owner-occupied mortgage. Lendmire (NMLS# 2371349) arranges DSCR programs through select lenders in its wholesale network, spanning 40 markets, including Washington, D.C. Across those programs, cash-out refinances generally top out around 75% loan-to-value, with roughly six months of ownership seasoning typically expected first. Purchase-money DSCR files usually run 75%-80% loan-to-value, with select high-leverage programs reaching 85% for borrowers with strong credit. A clean, correctly recorded note and mortgage or deed of trust from the private-money stage is what lets a DSCR lender’s title search and payoff process go smoothly at that refinance. Investors chaining a hard money bridge into permanent financing this way can go deeper in Lendmire’s guide to refinancing a hard money loan after the BRRRR strategy.
Lendmire is a mortgage broker. It arranges these DSCR and hard money placements through select lenders in its network rather than funding them directly, and title is often held in an LLC, subject to lender program eligibility.
Common Mistakes That Turn a Private Loan Into a Problem
Overpromising the return tops the list. Say you tell a lender the rate is fixed, then later offer a profit share instead. You’ve just handed them a different legal instrument than the one they signed up for.
Skipping recording is close behind. An unrecorded mortgage or deed of trust leaves the lender’s position invisible to a future title search, which can delay or derail the eventual refinance.
Treating “private” as a synonym for “unregulated” causes damage too. Usury caps, disqualified-person rules on IRA capital, and securities exemptions all apply whether or not a bank is anywhere near the transaction. For the outreach and pitch side of raising, Lendmire’s guides on how to raise private money for real estate and where to find private money lenders cover that ground; for a fuller definition of the category itself, see what is private money lending.
Nothing here is a commitment to lend, and loan approval is never guaranteed. Every scenario described here is subject to lender approval, plus borrower, property, and program guidelines that vary by lender and change over time. This article is general information, not financial, legal, or tax advice. Investors should speak with a qualified attorney before structuring a raise, and a qualified tax professional before relying on any tax treatment.
Frequently Asked Questions
Is it legal to borrow money from friends and family for a real estate deal?
Yes, in most structures. A straightforward, fixed-interest loan from one or a few known people is usually treated as ordinary private debt, not a security, as long as the return doesn’t depend on your management or shift into a profit share. Once the arrangement starts looking like an investment in your business rather than a simple IOU, securities rules can apply.
How many private lenders can I raise from before I need SEC paperwork?
There’s no fixed headcount that triggers registration — the Howey Test looks at the structure of the deal, not the number of people. That said, sponsors pooling capital from more than a handful of passive investors typically use a Rule 506(b) exemption, which allows an unlimited number of accredited investors plus up to 35 non-accredited ones.
Can I use my self-directed IRA to lend money to my own deal?
Not to your own deal directly. The IRA owner and close family members count as disqualified persons under IRS rules, and lending to a disqualified person is a prohibited transaction. An IRA can lend to unrelated borrowers, and in some cases to a sibling, but the loan must be secured by the property itself, never by the owner’s personal guarantee.
What’s the difference between private money and hard money?
Private money typically comes from a person weighing both the property and your track record. Hard money comes from a professional lender or fund that underwrites almost entirely against the asset itself. Both can cost more than a bank and often use bridge structures, but the underwriting approach behind each is different.
Do I need to advertise my deal to raise private money?
No. Most sponsors raise quietly under Rule 506(b), which prohibits public advertising in exchange for letting investors self-certify their accredited status. Public advertising is only permitted under Rule 506(c), which requires independently verifying every investor’s accredited status before they can invest.
The exit plan matters as much as the purchase price on short-term financing. See refinancing out of a hard money loan with a DSCR loan.
About Lendmire
Lendmire — NMLS# 2371349 — is a DSCR and non-QM mortgage brokerage. It offers investor loan programs in 40 markets, including Washington, D.C. Lenders commonly review DSCR eligibility around property-level rent rather than personal income documentation, subject to lender guidelines, and the brokerage helps arrange financing for LLC-owned portfolios beyond conventional financed-property limits. Scotsman Guide recognized Lendmire as a Top Mortgage Workplace in 2025 and 2026.
Many investors treat hard money as the acquisition tool and plan the exit up front.
Scotsman Guide documents Lendmire’s Top Mortgage Workplace recognition in its Scotsman Guide 2025 Top Mortgage Workplace and Scotsman Guide 2026 Top Mortgage Workplace lists.
Get Started
Ready to find the right loan for you?
In about 30 seconds you can review financing options available for your home or investment property. No commitment required.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. SEC Investor.gov — Private Placements Under Regulation D
2. KKOS Lawyers — Real Estate Investor Escapes Criminal Charges
3. Akin Gump — SEC Staff Guidance on Private Offerings
4. FortuneBuilders — Raising Private Money for Real Estate Deals
5. Coleman & Horowitz — Understanding Usury
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.
