Private lenders have a reputation problem. Some people think they’re sharks charging usurious rates. Others think they’re a magic solution that approves anything.
The reality is more nuanced. Private lenders serve a legitimate purpose in the commercial real estate financing ecosystem, but they’re not right for every deal. Let me break down when private money makes sense, what it actually costs, and how to use it strategically without getting burned.
What Are Private Lenders?
Private lenders are individuals or small companies that lend their own money (or money they’ve raised from investors) on commercial real estate deals.
Unlike banks or credit unions that lend depositors’ money under strict regulatory oversight, private lenders are using private capital and have far more flexibility. They can approve deals that banks reject, close faster than institutional lenders, and structure creative terms.
The trade-off? Higher rates and fees.
Private lenders in Canada range from small individual investors lending $100,000 on a second mortgage to sophisticated private lending funds deploying $50 million+ across dozens of deals.
What Private Lenders Actually Cost in 2026
Let me give you realistic numbers so you know what you’re looking at.
Interest Rates
First mortgage private lenders: 8.5-12% Second mortgage private lenders: 10-15% Third position or higher risk deals: 12-18%+
These are annual interest rates, and they’re typically higher than what banks charge (5.5-7.0% for conventional deals in 2026).
Lender Fees
Most private lenders charge upfront fees in addition to interest:
- Commitment fee: 1-2% of loan amount
- Lender fee (brokerage fee paid to the lender): 1-3%
- Underwriting/due diligence fees: $500-$2,000
On a $500,000 private mortgage, you might pay $15,000-$25,000 in upfront fees plus 10% annual interest.
Terms
Private mortgages are typically short-term:
- Most common: 6-12 months
- Sometimes: 1-2 years
- Rarely: 3+ years
Interest-only payments are common—you’re not paying down principal, just making interest payments, and the full principal is due at maturity.
Total Cost Example
Let’s say you borrow $500,000 from a private lender at 10% interest for one year, with 2% lender fees.
- Upfront fees: $10,000
- Interest over 12 months: $50,000
- Total cost: $60,000
That’s 12% total cost for the year. Expensive compared to a bank at 6%, but there’s a reason you’re using private money rather than bank financing.
When Private Lenders Make Sense
Private lenders aren’t for long-term holds. They’re for specific situations where speed, flexibility, or credit challenges make traditional financing impossible or impractical.
Let me give you scenarios where private lending is the right tool.
Scenario 1: Bridge Financing
You’re buying a building for $2 million, but it needs $300,000 in renovations before a bank will approve permanent financing. The property is currently only 60% occupied with month-to-month tenants—no bank will touch it.
Private lender solution: Borrow $1.6 million from a private lender at 10% for 12 months. Close the purchase, do the renovations, lease up the building to 85% occupancy with good tenants on long-term leases. Six months later, refinance with a bank at 6%, pay off the private lender, and move forward with conventional financing.
You paid 10% interest for six months ($80,000 on $1.6M) plus some fees, but you were able to buy a great building at a discount that you couldn’t have purchased with conventional financing. The value-add play made the private lending cost worthwhile.
Scenario 2: Credit Repair Time
You had a business failure two years ago that damaged your personal credit. Your score is 590, and banks won’t talk to you. But your new business is thriving, and you want to buy the commercial building your business operates in.
Private lender solution: Get a private mortgage for 12-18 months. During that time, rebuild your credit by making on-time payments, clearing any remaining issues, and getting your score back over 650. Then refinance to conventional bank financing.
Private lending gives you time to fix your credit situation while still moving forward with your real estate acquisition.
Scenario 3: Time-Sensitive Deal
You found an incredible deal—a commercial building worth $3 million that you can buy for $2.2 million because the owner is divorcing and needs to sell immediately. They need to close in three weeks.
Bank financing takes 6-8 weeks minimum. You’ll lose the deal.
Private lender solution: Close with private money in three weeks, secure the deal, then refinance with a bank in a few months. You pay six months of private lending costs (maybe $60,000 on a $1.65M loan at 10%), but you captured $800,000 in equity that you wouldn’t have been able to access otherwise.
Scenario 4: Unusual Property
You’re buying a specialized property—maybe a marina, a car wash, a mobile home park—that banks don’t understand or don’t like.
Private lenders often care more about the loan-to-value ratio and less about the property type. If you’re putting 35-40% down and the property value is solid, many private lenders will approve deals that banks won’t touch.
Scenario 5: Complex Title Issues
The property has an easement dispute, a pending zoning change, or some other title complexity that makes banks nervous.
Private lenders can structure deals with conditions—“we’ll lend now, but you need to resolve the title issue within six months.” Banks don’t typically have that flexibility.
When Private Lenders DON’T Make Sense
Let me be equally clear about when private money is the wrong choice.
You Can Qualify for Bank Financing
If a bank will approve your deal at 6% and you’re using a private lender at 11% because you didn’t bother applying to banks, you’re wasting money. Always explore conventional options first.
You Don’t Have a Clear Exit Strategy
Private mortgages are short-term. If you can’t refinance to conventional financing or sell the property within the term, you’re in trouble.
I’ve seen borrowers take private money planning to “figure it out later,” and then when the mortgage matures, they can’t qualify for bank financing and they’re forced to renew with the private lender at even higher rates, or worse, the lender forecloses.
Never use private money without a clear, realistic plan for how you’ll pay it off.
The Property Doesn’t Support the Debt
Private lenders will lend based on equity, but if your property cash flow can’t service the debt, you’re setting yourself up for disaster.
Paying 10% interest on a property that yields 7% means you’re bleeding money every month. That’s fine for 6-12 months while you execute a value-add plan, but it’s not sustainable long-term.
You’re Buying at Full Market Value
Private lending makes sense when you’re buying below market and capturing equity, or when you’re adding value through improvements or operational changes.
Buying at full market value with private money means you’re just paying expensive financing without any compensating upside. The cost of capital becomes dead weight.
The Different Types of Private Lenders
Not all private lenders are the same. Let me break down the categories.
Individual Private Lenders
These are high-net-worth individuals lending their own money. They might be retired business owners, successful investors, or professionals who accumulated wealth and now lend it out.
Advantages: Very flexible, relationship-driven, can make decisions quickly, sometimes willing to structure creative terms.
Disadvantages: Limited capital (usually $100,000-$2 million per deal), inconsistent underwriting standards, sometimes inexperienced.
Private Lending Funds
These are professional organizations that raise money from investors and deploy it into real estate mortgages. They have underwriting standards, approval committees, and standardized processes.
Advantages: Consistent underwriting, significant capital available, professional operations, established track records.
Disadvantages: Less flexible than individuals, higher rates and fees, more formal requirements.
Mortgage Investment Corporations (MICs)
MICs are a Canadian structure where investors buy shares in a corporation that holds a portfolio of mortgages. The MIC distributes income to shareholders.
MICs operate similarly to private lending funds but have specific regulatory structure and tax treatment.
Advantages: Substantial capital, professional management, consistent approach.
Disadvantages: Standardized rates and terms, less room for negotiation.
Family Offices
Some wealthy families lend money as part of their investment activities. They’re often more flexible than institutional capital but more professional than individual lenders.
Advantages: Large capital capacity, flexible terms, relationship-driven, patient capital.
Disadvantages: Selective about deals, often want long-term relationships rather than one-off transactions.
How Private Lenders Evaluate Deals
Private lenders think differently than banks. Let me explain their decision-making process.
Loan-to-Value Is King
The most important factor for private lenders is LTV—how much they’re lending compared to the property value.
Most private lenders cap at 65-75% LTV on first mortgages. Some will go to 80% for great properties in strong markets.
Second mortgage lenders focus on combined LTV—if there’s a $700,000 first mortgage and they’re adding a $200,000 second mortgage on a $1.5 million property, the combined LTV is 60%, which they’re comfortable with.
Why does LTV matter so much? Because if you default and they have to foreclose, they want to be confident they’ll get their money back. At 65% LTV, the property value can drop 35% and they still break even.
Equity and Skin in the Game
Private lenders want to see that you have substantial equity at risk. If you’re putting 30-40% down, they know you’re motivated to make the deal work because you have a lot to lose.
If you’re putting 5% down and trying to borrow 95% from private money? That’s not happening. You haven’t committed enough of your own capital.
Exit Strategy
Private lenders care deeply about how they’re getting paid back. You need a clear, realistic exit plan:
- Refinancing to a bank once you improve the property/credit
- Selling the property
- Getting a cash infusion from a business partner or investor
- Converting to permanent financing from an alternative lender
Vague plans like “I’ll figure it out” or “property values will go up” don’t work.
Property Quality and Marketability
Private lenders want properties that they could sell easily if they had to foreclose. A well-located commercial building in a strong market? Easy to approve.
A specialized industrial property in a remote location? Much harder, even if the LTV is conservative.
Borrower Character
Banks focus on credit scores and financial statements. Private lenders focus on character and track record.
If you’ve successfully completed several real estate projects, even if your credit isn’t perfect, many private lenders will back you. They’re investing in you as much as the property.
Conversely, if you have no track record or a history of failed projects, private lenders get nervous even if the numbers look good.
Red Flags to Watch For
Not all private lenders are reputable. Here are warning signs of problematic lenders.
Unusually High Fees
If you’re being quoted 5% lender fees plus 3% broker fees plus 2% commitment fees plus administration charges, you’re getting gouged. Total upfront fees should generally be 2-4% of loan amount.
Unclear Terms
If the lender can’t give you a clear written term sheet outlining rate, fees, term, and conditions, walk away. Everything should be documented in writing before you commit.
Requests for Upfront Payments Before Approval
Legitimate lenders don’t charge you money before they’ve approved your deal and issued a commitment. Appraisal fees paid to the appraiser are normal; paying the lender $5,000 “processing fee” before approval is a red flag.
Unlimited Renewal Clauses
Some predatory lenders include clauses that let them renew the mortgage indefinitely at whatever rates they choose. You need clear terms on renewals and rights to pay out the mortgage.
Compound Interest or Daily Interest Calculations
Standard mortgages calculate interest monthly or semi-annually. Lenders using daily compounding or unusual interest calculations are trying to increase their effective rate beyond what’s quoted.
Working with Private Lenders Through a Broker
Here’s where mortgage brokers add huge value in the private lending space.
First, we know which private lenders are reputable and which ones to avoid. We’ve worked with dozens of private lenders and we know who has reasonable rates, who closes deals reliably, and who to stay away from.
Second, we can shop your deal to multiple private lenders to get competitive terms. Private lending isn’t a commodity—different lenders quote different rates and fees. We get you the best available terms.
Third, we handle the negotiation. Private lenders often have flexibility on rates and fees, especially for strong deals. We know how to negotiate to improve your terms.
Fourth, we manage the process. Private lending involves a lot of moving parts—appraisals, legal documentation, title insurance, funding coordination. We make sure it all happens smoothly.
Fifth, and perhaps most important, we help you plan the exit strategy. We know which banks or alternative lenders to target for your refinancing six months from now. We’re thinking about your long-term financing plan, not just the immediate private mortgage.
The Strategic Use of Private Money
Smart real estate investors use private money strategically as a tool, not as a last resort.
They use it to close deals quickly, capture opportunities that require speed, bridge financing gaps, or buy properties that need work before they qualify for conventional financing.
They don’t use it for long-term holds (too expensive), for deals without built-in equity (too risky), or as a substitute for proper credit management.
The key is understanding that private lending is expensive, short-term bridge capital. Use it to solve specific problems or capture specific opportunities, then refinance to cheaper permanent financing as soon as possible.
Real-World Example
Let me give you a real example (details changed for privacy) of strategic private lending use.
Client found a 12,000 square foot commercial building for $1.8 million. The building was only 50% occupied, in rough condition, and the seller was motivated.
Market value if the building was renovated and fully leased: $2.6 million.
Bank financing: Not available. Banks won’t lend on a half-empty building in rough shape.
Private lending solution:
- Private lender advanced $1.35 million at 10% interest for 12 months
- Client contributed $450,000 down payment
- Client spent $200,000 on renovations over 4 months
- Client leased the building to 85% occupancy over 6 months
- After 8 months, client refinanced with a bank at 6.5% for $2 million, paying off the private lender
- Client’s total cost for the private mortgage: interest of $90,000 + fees of $30,000 = $120,000
End result:
- Client captured $800,000 in built-in equity ($2.6M value - $1.8M purchase)
- Client has permanent bank financing at reasonable rates
- The $120,000 cost of private money was well worth it to capture the deal
This is how you use private lending strategically—as a bridge to capture opportunity that you couldn’t access with conventional financing.
The Bottom Line
Private lenders serve an important role in commercial real estate financing. They provide speed, flexibility, and approval for deals that banks reject.
The cost is high—typically 8-12% interest plus 2-4% in fees, for short terms of 6-24 months.
Private money makes sense when you need speed, when you’re buying below market with built-in equity, when you’re executing a value-add strategy, or when temporary credit or property condition issues prevent conventional financing.
It doesn’t make sense for long-term financing, for deals without clear exit strategies, or as a substitute for proper financial planning.
Use private money strategically as a tool to capture opportunity, then refinance to cheaper permanent capital as soon as you can.
If you’re considering private financing for a commercial real estate deal, contact Creek Road Financial Inc. for a free consultation. We work with reputable private lenders across Canada and can help you evaluate whether private money makes sense for your situation—and if so, negotiate the best possible terms.