What Private Money Really Costs: Rate, Points, Time and the Capital Stack

When an investor tells me a private-money loan is "12%," I still do not know what the money costs.

I need the rest of the deal.

What are the points? How long is the hold? Is there minimum interest? Are there document, legal, draw, or extension fees? Is interest paid monthly or accrued? Is rehab funded at closing or reimbursed through draws? Is there a second-position lender? Does anyone receive a piece of the upside?

The interest rate is one line. Capital is a structure.

Start with dollars funded

Assume a project needs $250,000.

A first-position lender funds 70%, or $175,000.

A second-position private lender funds the remaining 30%, or $75,000.

Now price each source separately.

First-position loan

Points:

$175,000 x 2% = $3,500

Interest:

$175,000 x 10% / 12 x 6 = $8,750

Total estimated cost:

$3,500 + $8,750 + $750 = $13,000

Second-position loan

Points:

$75,000 x 3% = $2,250

Interest:

$75,000 x 12% / 12 x 6 = $4,500

Total estimated cost:

$2,250 + $4,500 + $500 = $7,250

Combined capital cost: $20,250.

That is the number I want in the project budget.

Blended cost

The blended cost over the modeled six-month period is:

$20,250 / $250,000 = 8.1% of the funded capital.

Do not confuse that six-month project cost with an annualized yield. The point here is simply to understand how many project dollars the capital consumes.

The hold period is a weapon against you

Now assume the project takes nine months instead of six.

The points do not change, but the interest grows.

The first-position interest rises from $8,750 to $13,125.

The second-position interest rises from $4,500 to $6,750.

Three extra months cost another $6,625 before any extension fees.

This is why time sensitivity belongs in every short-term real estate model.

Draws change the math

Some lenders do not fund the entire rehab amount on day one. They reimburse completed work through draws.

That can reduce interest if interest is charged only on funds actually advanced. It can also create a working-capital problem if you have to pay contractors before receiving reimbursement.

Your calculator should distinguish:

A simple model that charges interest on the entire commitment may be conservative, but it should be labeled.

Equity participation is a different animal

Sometimes a private or GAP lender wants a lower interest rate plus a percentage of profit.

That can be excellent capital if it gets the deal done and aligns both parties. It can also be extremely expensive on a successful project.

If someone funds $75,000 and receives 25% of a $120,000 project profit, that is $30,000 of upside before considering interest or points.

Price the entire economic package.

Cost is not the only consideration

A 9% lender who takes four weeks to close may be more expensive to your business than a 12% lender who can fund in five days if the faster lender lets you buy a deeply discounted property.

Availability, certainty, flexibility, and reputation matter.

The question is not, "What is the cheapest money?"

The question is, "What capital gives this specific deal the best risk-adjusted chance of succeeding?"

Then put every cost into the underwriting before you decide what the deal makes.

Build a maturity and extension line into the model

Short-term capital often looks fine until the calendar becomes the problem. If a six-month loan matures while the property is still in construction or escrow, the lender may charge an extension fee, raise the rate, demand a principal paydown, or simply refuse to extend.

Model that possibility before closing. Add a downside case with three extra months of interest and the stated extension fee. If the lender charges one additional point to extend, that is another $1,750 on a $175,000 first-position balance before the extra interest.

Then ask a more strategic question: does the maturity give the business plan enough room? A twelve-month note on a projected six-month flip may be safer than a six-month note even if the shorter paper is slightly cheaper.

Private lenders deserve real reporting

If you want repeat capital, treat private lenders as serious stakeholders. Provide a concise update on closing, construction progress, budget, timing, and exit. If something goes wrong, communicate before the payment or maturity becomes a surprise.

A good reporting cadence can be simple: current balance, work completed, remaining budget, updated timeline, current value support, and next milestone. That level of transparency helps a lender understand that you are operating a project, not disappearing with their money.

The best outcome is not one cheap loan. It is a capital relationship that becomes easier and more reliable over time because both sides know what to expect.