The First-Time Private Lender’s Checklist: How to Protect Your Capital Before Funding a Deal

Most people think private lending begins when you wire the money.


It doesn’t.


Private lending begins long before the closing table.


It begins with asking the right questions, following a consistent process, and protecting yourself before your money ever leaves the bank.


One of the reasons private lending has created wealth for so many investors is that it can be structured to reduce risk while generating attractive returns. However, like any investment, success depends on discipline. The lenders who get into trouble are often the ones who skip steps, make emotional decisions, or assume everything will work out because they trust the borrower.


If you’re considering your first private lending deal, here is the exact thought process I would encourage you to follow before funding a loan.

Step 1: Start With the Borrower

Many new lenders focus almost entirely on the property.


Experienced lenders focus on both the property and the person.


Ask yourself:

  • Does this borrower have experience?
  • Have they completed similar projects?
  • What is their track record?
  • Do they have references?
  • How do they communicate?
  • Do they seem organized and professional?


Remember, even a great property can become a problem if it’s managed by the wrong borrower.


A good borrower can often navigate challenges.


A poor borrower can create challenges where none existed before.

Step 2: Understand the Exit Strategy

One of the first questions I ask is:


“How am I getting paid back?”


The borrower should be able to clearly explain the exit strategy.


Examples include:


Fix-and-Flip

The property will be renovated and sold.


Rental Refinance

The property will be refinanced into long-term financing.


Owner Finance

The property will be sold with seller financing to a retail buyer.


Cash Purchase

The borrower intends to repay the loan from available cash reserves.


If the exit strategy is vague or overly optimistic, proceed carefully.


The simpler and more realistic the repayment plan, the better.

Step 3: Verify the Value of the Property

This is where many new lenders make mistakes.

Never rely solely on:

  • Zillow
  • Tax records
  • Online estimates
  • The borrower’s opinion


Instead, verify the property’s value using multiple sources.


Possible valuation methods include:

 

  • Comparative Market Analysis (CMA)
  • Desktop Appraisal
  • Full Appraisal
  • Broker Price Opinion (BPO)

 

The goal is simple:


Confirm what the property is actually worth—not what someone hopes it will be worth.

Step 4: Understand the Equity Position

If there is one concept every new lender should understand, it’s equity.


Equity is your margin of safety.


Let’s use a simple example:

  • After Repair Value (ARV): $200,000
  • Repairs: $40,000


Many experienced lenders would limit their loan amount to approximately 75% of ARV.

In this example:

  • ARV: $200,000
  • Maximum Loan: $150,000


That creates a cushion in the deal.

If something goes wrong, there is hopefully enough equity to protect the lender.


Could you lend more?


Absolutely.


Should you as a new lender?


Probably not.


The 75% rule has protected lenders for decades because it provides room for mistakes, delays, market shifts, and unexpected costs.

 

Step 5: Drive the Property

This may sound old-fashioned.


Do it anyway.


One of the best pieces of advice in real estate is:


Drive the comps.

 

  • Look at:
  • The property itself
  • The neighborhood
  • The comparable sales
  • Nearby retail and amenities
  • Overall property condition


Photos rarely tell the whole story.


You’d be surprised how often a quick drive-through reveals information that doesn’t show up on paper.

Step 6: Review the Numbers Objectively

This is where emotions need to be removed entirely.


Ask questions like:

  • Are repair estimates realistic?
  • Is the timeline reasonable?
  • Is there enough profit in the deal?
  • What happens if costs increase?
  • What happens if the property takes longer to sell?


Good lenders don’t analyze best-case scenarios.


They analyze what happens if things don’t go according to plan.

Step 7: Confirm Proper Documentation

Before funding any loan, make sure the transaction is properly documented.

 

  • Typically this includes:
  • Promissory Note
  • Deed of Trust or Mortgage
  • Title Insurance
  • Hazard Insurance
  • Closing through a title company or attorney


This is not the time to cut corners.


Professional documentation protects everyone involved.

Step 8: Stay Within Your Comfort Zone

One of the biggest mistakes new lenders make is stretching outside their knowledge.


You do not need to fund every deal.


You do not need to chase the highest interest rate.


You do not need to compete with institutional lenders.


Your goal is simple:


Protect principal first.


Many successful private lenders have built substantial wealth by consistently making conservative loans on quality assets with trustworthy borrowers.


Slow and steady works remarkably well in this business.

The First-Time Private Lender Checklist

Before funding your first deal, ask yourself:


☐ Do I know the borrower and understand their experience?
☐ Do I clearly understand how I’ll be repaid?
☐ Have I independently verified the property’s value?
☐ Does the deal have sufficient equity?
☐ Have I reviewed comparable sales?
☐ Have I physically seen the property or had someone I trust inspect it?
☐ Have I reviewed the numbers conservatively?
☐ Is the loan properly documented?
☐ Do I have title insurance and adequate collateral protection?
☐ Am I comfortable with the risk if the deal takes longer than expected?


If you cannot confidently check every box, pause and gather more information before proceeding.

Final Thoughts

Private lending doesn’t have to be complicated.


But it does require discipline.


The best lenders aren’t necessarily the smartest people in the room. They’re the ones who consistently follow a process, verify the facts, and refuse to let emotions influence their decisions.


Every successful lending portfolio is built one deal at a time.


Take the time to analyze each opportunity carefully, protect your downside, and stay focused on long-term consistency.

 

Because in private lending, your goal isn’t simply to earn interest.

 

Your goal is to get your principal back—plus interest—every single time.

 

Protect principal first. Everything else comes second.
Brant Phillips