So massive is the overall private credit market that it swelled to $3 trillion in assets in 2025 and is on its way to reach $5 billion within the next four years.
It looks like more and more people are also using private money to fund commercial property deals.
It’s true that banks still account for roughly half of the $6 trillion US CRE lending market, but that share has been steadily declining over time in favor of non-bank entities, including private debt funds.
Like many CRE investors who might have been turned down by a bank for some reason or another — or developers who just don’t have time to wait months and months for traditional underwriting — you’ve probably looked into private money loans to buy a commercial property.
These short-term, asset-backed loans can help you get your deal across the finish line faster than any bank loan ever could.
But naturally, you have to pay for that speed in the form of higher interest rates and stricter timelines.
You also need to be extra careful about how the loan is structured and documented, as uneven regulation can trip up your deal if you’re not careful.
So, before you accept the funds, make sure that you know exactly what you’re signing up for and what protections you may or may not have.
What makes private money loans different from other commercial property loans?
Unlike bank loans or even non-QM loans like DSCR or asset-based financing, private money CRE loans come from individuals or private lending companies.
Because they usually have a lot of experience in the commercial property business themselves, these lenders care more about the value and potential of your property than about your credit score or your tax returns.
This is why they are generally more open to funding distressed buildings that need a lot of renovations, which many traditional lenders won’t approve.
When you take out a private money loan, you are agreeing to secure the loan with the property itself, and if necessary, with additional properties you already own.
This collateral-first structure can give you negotiating power with the lender because it lets you use your equity position (not just your financial profile) to get the funding you need.
But be careful.
If you don’t plan carefully, the above-market interest rates and shorter repayment windows, especially when combined with lender-imposed upfront fees, can quickly eat into your margins.
When can CRE borrowers use private money loans?
Have you ever needed to close on an off-market multifamily deal within days because the seller had another buyer lined up with all cash?
Then you know that waiting on a bank’s timeline can quickly squash your negotiating advantage.
Having access to private money CRE loans will keep you in the running for deals like these.
You can use them to:
- Buy distressed or undervalued commercial properties
- Finance renovations or ground-up construction
- Compete in auctions
- Close before you lose a zoning approval/permit window
- Buy out a partner under a tight contractual window
Many CRE investors who don’t meet the strict income documentation or credit requirements of traditional or non-QM lenders also use private money to raise capital.
Are there benefits to using private money loans for commercial real estate investing that you can’t get from bank loans?
Absolutely. Among the biggest advantages to using private money loans is, of course, speed.
You can go from application to funding in days because many lenders don’t use traditional appraisal processes.
Private lenders don’t run your application through standardized models like banks do, so they are also much more flexible in tailoring the structure of the loan around your acquisition strategy and exit plan.
If you can tell them exactly how you plan to repay or exit, they may be open to creative terms, especially if you’ve got the equity and the experience they tend to look for when funding outside-the-box transactions.
Does your income seem irregular or hard to explain on paper because you perhaps own multiple businesses or take most of your earnings as distributions? It doesn’t matter.
Private money loans rely on the value of the property, not your tax returns or your W-2s.
Are there downsides to using private money loans for commercial real estate investing?
You’ll pay more in interest when you choose to take out a private money CRE loan.
Terms are also shorter — as short as 6 to 18 months in some cases — so you need to have a clear exit plan before you even apply for the loan.
That short fuse could force you into an unfavorable refinance if the market turns suddenly or construction delays like subcontractor no-shows push your timeline into penalty territory.
Upfront costs in the form of origination fees and closing charges can cut into your budget quickly, so you have to negotiate what you can and factor in what you can’t.
And since these loans are collateralized, you’re putting your commercial property — and any cross-collateralized assets — at risk if the loan goes bad.
What should you, as a borrower, need to know about hard money lending rules?
Hard money loans are no doubt faster and more flexible than traditional loans, but just because they’re this way doesn’t mean that they’re exempt from lending and disclosure rules.
Even though these loans come from private individuals or investor groups instead of banks, they’re still subject to both federal and state laws in most cases.
You need to understand the legal and financial implications on your side of the deal to protect yourself and the property you’re putting on the line.
Don’t assume that your loan is exempt from regulations
Some lenders may tell you a hard money loan doesn’t need to follow federal mortgage regulations because it’s “private.” That’s not always true.
Depending on the type of property and how the loan is structured, the loan might fall under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), both of which exist to protect you as a borrower.
These laws require lenders to clearly disclose the interest rates, fees, and terms well in advance of closing.
If your loan qualifies as a consumer-purpose mortgage (like buying or improving a residential property you plan to occupy), TILA and RESPA likely apply.
Mislabeling the loan as commercial when it’s not could expose both parties to legal trouble.
If it is a true business-purpose loan — like acquiring or flipping a commercial or investment property — it may be exempt.
But document everything clearly so that there are no disputes or penalties later.
Find out your state’s lending rules
Did you know that state laws still apply even if a hard money loan is exempt from federal rules? These laws may include:
- Interest rate caps (usury laws)
- Licensing requirements for lenders
- Disclosure rules for fees and repayment terms
If your lender isn’t licensed in a state that requires it, your loan could be void, or worse, unenforceable.
So always check if the lender is allowed to operate in your state before you sign anything.
Some states restrict how many loans a private lender can make before needing a license, so that part is worth confirming, too.
What should you do to protect your interests before agreeing to the terms of a hard money loan?
- Ask if the lender is licensed in your state (if your state requires this).
- Request written documentation that states whether the loan falls under TILA or RESPA.
- Clarify how the interest will be calculated. Will it be charged monthly, annually, or compounded over time?
- Check if there are hidden fees. Some loans include steep origination points or ongoing servicing fees. You might also be slapped with penalties if you repay early or default, so always check the exit clause.
- Confirm the total repayment amount. You want to see the full cost of the loan and not just the monthly payments or interest rate.
- Review the default terms very carefully. Know exactly what will happen if you miss a payment.
- Don’t just rely on the lender’s word. Speak to a real estate attorney to make sure that the deal is compliant and that your interests are protected.
What to do if the lender isn’t licensed
Private lenders are allowed to fund a few loans per year, even without a license in some states, but others don’t allow any unlicensed lending at all. Is your lender operating outside the law?
Beware — your contract might not hold up in court.
Worse, you could lose your property if the lender enforces illegal terms or starts foreclosure proceedings.
- Verify the lender’s licensing status to protect yourself
- Get all terms in writing
- Understand your rights to contest or renegotiate terms
Hard money has risks for both sides
The lender takes on risk by trusting you to repay, but you’re also taking a risk if the lender doesn’t comply with legal standards.
That’s why it’s so important to:
- Do your due diligence on the lender
- Work with professionals (lawyers, brokers) who understand hard money lending
- Read every clause of your loan agreement, including the fine print
Work with a reliable lender from the start
Here at Private Capital Investors, we’ve been directly financing commercial deals for decades, and we’re still the lender CRE investors come back to. Contact us to talk about your commercial property project.
Sources:
https://www.wolterskluwer.com/en/expert-insights/do-hard-money-lenders-need-to-be-licensed
https://www.nb.com/en/global/insights/whitepaper-shifting-dynamics-in-the-cre-lending-market
