Private real estate lending is an excellent way to generate passive income, but not all deals are worth funding. A great deal can provide secure, consistent returns, while a poorly evaluated deal can lead to delays, defaults, or financial losses.
As a private lender, your success depends on your ability to analyze real estate investment deals. You need to assess the property value, borrower credibility, loan terms, and overall deal viability before committing your capital.
This guide will walk you through the key financial metrics, risk factors, and best practices for evaluating a real estate investment deal. By the end, you’ll have a clear, step-by-step framework to confidently choose the right deals and protect your investment.
How to Find Reliable Borrowers for Private Real Estate Lending
Understanding the Key Financial Metrics
Before funding a deal, you need to analyze its financial fundamentals. The right numbers will tell you whether a deal is profitable and how much risk is involved.
Loan-to-Value (LTV) Ratio
The LTV ratio is one of the most important risk indicators in private lending. It measures the loan amount relative to the property’s value.
Formula:
LTV = (Loan Amount ÷ Property Value) × 100
Recommended LTV Guidelines:
- Fix-and-flip loans: 65-70% of after-repair value (ARV).
- Buy-and-hold rentals: 70-75% of current market value.
- Riskier deals or inexperienced borrowers: Keep LTV under 65%.
Example:
If a borrower requests a $100,000 loan on a property worth $150,000 (ARV), the LTV is 67%, which is within the safe range for a fix-and-flip loan.
A lower LTV means less risk, as the property has to lose significant value before your investment is at risk.
After-Repair Value (ARV) and Current Market Value
For fix-and-flip deals, the after-repair value (ARV) estimates the property’s worth after renovations. For rental properties, the current market value is used to determine its worth as an income-generating asset.
To verify ARV and market value, analyze:
- Comparable sales (comps) of similar properties in the same area.
- Local market trends (rising or declining prices).
- Property condition (does it need minor repairs or a major renovation?).
If the borrower overestimates ARV, they may struggle to sell or refinance, putting your repayment at risk.
Debt Service Coverage Ratio (DSCR)
For rental properties, the DSCR determines whether the property’s income is enough to cover loan payments.
Formula:
DSCR = Net Operating Income (NOI) / Debt Payments
DSCR Guidelines:
- 1.25 or higher = Safe (property generates 25% more income than needed to cover loan payments).
- 1.0 or lower = High risk (property barely covers or doesn’t cover debt payments).
A DSCR of 1.5 means the property earns 50% more than necessary to cover debt payments—making it a safer deal.
Evaluating the Borrower’s Credibility
A great deal means nothing if the borrower isn’t reliable. Before funding a deal, assess the borrower’s experience, financial stability, and ability to execute the project successfully.
Experience Level
An experienced borrower is less likely to make costly mistakes and more likely to complete the project on time.
What to check:
- Past real estate projects: Have they successfully completed similar deals?
- Track record with lenders: Do they have a history of repaying loans on time?
- Expertise in the local market: Do they understand the area’s trends?
A borrower with 5+ successful fix-and-flip projects is a safer bet than a first-time investor.
Financial Stability
A borrower’s financial health determines their ability to handle unexpected costs and repay the loan.
What to check:
- Credit score: 680+ is ideal, but 620+ may be acceptable with strong experience.
- Cash reserves: Do they have enough liquidity to cover delays or repairs?
- Debt obligations: Too much debt can make repayment difficult.
A borrower with solid credit and strong reserves is less likely to default on the loan.
Assessing the Property and Market Conditions
Even if the borrower is experienced, the property and market conditions must also make sense for the deal to be viable.
Property Location and Demand
The location plays a significant role in whether the deal will succeed.
Key questions to ask:
- Is the property in a high-demand area?
- Are home prices appreciating or declining?
- How long do similar properties take to sell or rent?
A fix-and-flip property in a hot market with fast sales is a much safer investment than one in a declining market.
Condition and Renovation Costs
Overestimated repair costs or underestimated budgets can destroy a deal’s profitability.
What to verify:
- Are renovation costs realistic? Request a contractor’s estimate.
- Are there hidden issues? Check for structural problems, foundation issues, or zoning restrictions.
- Does the borrower have a contingency budget? Unplanned expenses can derail a project.
Common Deal Evaluation Mistakes and How to Avoid Them
Trusting the Borrower’s Projections Without Verifying Numbers
Many borrowers overestimate ARV and underestimate repair costs. Always:
- Get third-party property appraisals and contractor estimates.
- Compare numbers with recent comps in the area.
Ignoring Market Trends
Even a great property won’t sell or rent if the market is weak. Research:
- Inventory levels: High supply = lower property values.
- Job growth: More jobs = stronger housing demand.
- Neighborhood trends: Are major employers moving in or out?
A strong market supports your borrower’s exit strategy, reducing risk.
Funding a Deal Without a Clear Exit Strategy
Every deal must have a defined way for the borrower to repay the loan.
Common exit strategies:
- Fix-and-flip: Sell the renovated property.
- Buy-and-hold: Refinance with a long-term mortgage.
Avoid deals where the borrower has no clear plan for repaying your loan.
How The MicroBanking Method Helps You Evaluate Deals
Evaluating deals can be overwhelming, but The MicroBanking Method simplifies the process by providing:
- Proven deal analysis frameworks to assess risk and profitability.
- Lender-focused training to help you spot the best opportunities.
- Access to vetted borrowers with successful track records.
By following a structured evaluation process, you reduce risk, increase profits, and make smarter lending decisions.
Conclusion: The Complete Guide to Evaluating Real Estate Investment Deals as a Private Lender
A great private lending deal requires more than just a promising borrower—it must have strong financial fundamentals, a secure repayment plan, and a viable market environment.
By focusing on LTV ratios, DSCR, borrower experience, and market trends, you can confidently choose deals that maximize profit while minimizing risk.
Want a step-by-step framework for evaluating deals and growing your lending business? Visit The MicroBanking Method to learn how to identify high-quality deals and protect your capital in every transaction.