HOW I THINK ABOUT RISK VS REWARD IN PRIVATE LENDING

Every investor says they want great returns.

But the smart ones know: returns mean nothing without risk.

That’s why, as a private lender, my #1 job isn’t chasing yield —

It’s managing downside.

Because in this business, protecting the downside is what unlocks consistent returns over time.

Here’s how I think about it.

1. I Price for Risk, Not Just Return

I don’t lend just to get 12% and a point.

That’s the output — not the starting point.

Every deal starts with a simple question:

“If this borrower completely drops the ball, and I have to take the property back…

Would I want to own this asset at my loan basis?”

If the answer isn’t an immediate yes, I either reprice the risk or pass entirely.

Because I’m not just underwriting the deal —

I’m underwriting the exit.

2. Loan-to-Value is My First Line of Defense

Everyone focuses on the interest rate.

But I care more about the loan-to-value (LTV).

The lower the LTV, the more margin I have to be wrong.

The more cushion I have if the market shifts.

And the more confidence I have that I’ll be made whole — even in a worst-case scenario.

At 60–65% LTV, I’m not hoping for the best.

I’m preparing for the worst — and still in a strong position.

3. I Don’t Confuse “Secure” with “Safe”

A loan can be secured and still be dangerous.

A borrower with a liened property isn’t the same as a borrower with a real exit strategy.

I dig deep on every deal:

• What’s the borrower’s track record?

• Is their scope realistic?

• Are they over-leveraged on other projects?

• Can they actually pull off this flip or refinance?

Because a secured note on a broken project is still a problem.

I don’t just want security — I want clarity on the path to repayment.

4. I Don’t Chase Yield

A lot of private lenders fall into the same trap:

They see a 15%+ return and jump in.

But I’ve learned that high yield often signals high risk.

And unless the collateral and borrower justify it, I’d rather earn 12% on a safe deal than 15% on a ticking time bomb.

My best investments aren’t the flashiest —

They’re the ones that quietly pay me every month without drama.

That’s where real wealth compounds.

5. The Real Risk Is in the Operator

This is something people don’t talk about enough:

The real risk in private lending isn’t the deal — it’s the person executing it.

You can have a great property, great numbers, and a solid exit plan…

But if the borrower doesn’t have discipline, integrity, or grit?

You’re at risk.

That’s why I invest so heavily in relationships.

Because I’d rather fund a solid operator on a mediocre deal than a reckless one on a perfect spreadsheet.

Final Word

In private lending, return is the reward — but risk is the reality.

And most of the time, the difference between winning and losing comes down to one thing:

Underwriting with humility.

I never assume I’m right.

I stress test every scenario.

And I ask the question no one wants to ask:

“If this deal goes sideways… will I still sleep at night?”

If the answer is yes — I lend.

If the answer is no — I walk.

That’s how I balance risk and return.

That’s how I protect my capital.

And that’s how I plan to keep compounding — no matter what the market does.

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Stay sharp,

DK