Gap Funding In Real Estate Investing
Whether you’re new to real estate investing, or have been doing it for some time now, it’s likely you’ve encountered the phrase “gap funding” in real estate. Gap funding in real estate is simply a temporary loan that is used to provide cash influx to an investor while they work towards securing a long-term loan, or if they’re working with multiple properties simultaneously.
Gap funding is often referred to as a bridge loan in real estate investing because it “bridges the gap” between the primary sale of the first property and the purchase of a second property. This way, the buyer is able to leverage the equity of the first property when buying the second property, then securing a loan while the first property is still on the market. You may also hear this kind of loan referred to as a swing loan, gap financing, or interim financing.
Gap funding can prove to be extremely beneficial to investors who need access to money immediately while their long-term financing is pending. If you need capital to help cover expenses while you’re still awaiting your permanent loan, gap funding may be the right option for you.
Gap Funding In Real Estate
Many real estate investors utilize private money or a hard money loan for investing purposes. However, often times, these lenders only cover 70% to 80% of the purchase price of a property. This means that the real estate investor is left to come up with the remaining 20% to 30% as a down payment, in addition to closing costs. For that reason, the majority of borrowers will need to secure additional money to cover these costs, which is exactly where gap funding comes in.
Gap funding can help bridge the gap between the hard money loan and the remaining costs associated with your investment. That means that the additional funding can assist in covering the remaining acquisition costs, as well as the expenses sustained from remodeling, advertising, then selling the property.
When considering a gap loan for your investment project, it is important to bear in mind that the rates are typically more expensive than a private or hard money loan. Gap loans are considered “second position loans”, meaning they’re subordinate to the primary original loan you have acquired. The lender will compensate for the added risk of the secondary loan with more expensive rates.
Sometimes, gap funding lenders may also require the borrower to pay a percentage of the profit they make from the impending deal once it’s complete. Gap funding has provided opportunity to many investors that may have not have been able to secure a deal otherwise, but it must be used cautiously.
Pros of Gap Funding
There are many positive aspects of gap funding, and it could serve as a great way to financially assist you along your real estate investing journey.
One positive aspect of gap funding is that it is perfectly suited for high-volume house flippers, specifically those who are looking to tackle multiple projects at one time. Gap funding can help alleviate the risks that an investor could encounter from a slow sale after flipping a house, or any situation that could unexpectedly decelerate the fix-and-flip process. With gap funding, the investor does not need to worry about closing one deal before moving onto the next.
When utilizing gap funding, you can also increase the number and scope of your real estate deals, since it allows you to avoid being tied up in capital constraints that you would otherwise normally encounter. In the long run, this can increase your revenues and profits, allowing you to grow your business at an even faster rate.
Another pro of gap funding for real estate investors that we already briefly touched on, is that gap funding can cover the difference between hard money loans and the remaining costs of your investment property. Because of this, gap funding makes it possible for many investors to secure deals that they otherwise couldn’t have.
Gap funding can also help investors with other steps in the fix-and-flip process, besides just purchasing the property. The additional money can allow you to advertise the home properly to ensure that you find the deal you’re looking for, as well as cover any closing costs when you go to sell the house.
One last positive associated with gap funding is that it allows for financial freedom. In theory, with gap funding, you can fix-and-flip an investment property with no capital whatsoever. While this is not normally the case, gap funding does allow you to use your own money for personal finances, as opposed to having it tied up in your real estate investment.
Cons of Gap Funding
While there are many positive sides to gap funding, there are also negative aspects that you should be aware of when considering whether or not it is right for you.
Because of gap funding’s short-term nature, it makes it more beneficial for investors juggling multiple projects at once, and less ideal for those who are attempting a single fix-and-flip. The additional costs are generally meant to meet the needs of those who intend to flip a large number of properties simultaneously. In most cases, the cost of a gap loan probably isn’t worth taking on if you only plan on flipping one property at a time.
Another negative to gap funding is reward-sharing. While the lender is incurring additional risk by taking you on as a borrower, the reward for them is high in the fact that there’s a chance that you may have to forfeit up to half of your profit in return for a zero-cash deal. If the deal benefits you financially even after sharing the profit, then you may want to consider saving your capital and taking an alternative route.
Gap funding also consists of increased rates. Because of the increased risk put on lenders, borrowers are expected to pay more interest. Usually, the rate is much higher than your average private or hard money loan.
When Should You Use Gap Funding?
Real estate gap funding has been known to be incredibly beneficial for many investors, particularly those who are starting with very little capital, or investors who have multiple properties on the market at one time. However, there is a time and a place for gap funding, and it is not necessary for every deal. Because of the high risks connected with it, it should be used sparingly, and you should weigh the pros and cons to determine whether or not it’s right for you.
Gap funding may be beneficial for you if:
- You can’t afford the down payment without equity from the first property.
- Larger projects have the ability to yield larger returns.
- You expect to sell the first property within the next few months, and are ready to purchase another property now.
- Local sellers aren’t willing to accept offers based on contingencies.
- You don’t have enough capital to secure a deal.
- Capital is needed to complete any rehabbing projects on the investment property.
- Interest payments are increasing because a deal is taking longer to complete.
However, gap funding isn’t always a good idea. You should also consider some circumstances in which gap funding may not work out for you, such as if:
- You don’t know how long it will take to sell the first property, or if it will sell at all.
- You don’t need the funding to make a down payment on the second property.
- You can secure financing in your area without gap funding.
- You aren’t certain you could afford two mortgages at once.
How and Where To Get Gap Funding
If you want to look into acquiring gap funding for your real estate investment, you must first decide whether you want to buy traditionally from a bank, or privately from a lender. If you’re looking to acquire a gap loan from a bank, you will need to apply for it, similar to a traditional loan. If you want to use a private lending resource, you will need to find the right private money lender. Since gap lending is riskier than a hard money or private loan, investors must convince the gap lenders that their real estate investment would be worthwhile. Remember that often times, the higher the chance of success the deal has of landing, the more likely the private lender is to provide you with a gap loan.
Hard Money Lenders IO Gap Funding
If you need to perform complex financing options, such as gap funding in Florida, then Hard Money Lenders IO is here to assist you every step of the way.
We provide gap funding to those in need of cash for great investment deals. Hard Money Lenders IO offers quick approval, reasonable rates, and access to the funds you need to make deals happen.
We look forward to helping you develop your portfolio by providing gap funding that increases your ability to invest in great deals hitting the market – even if your equity is currently tied up in another property.
In summary, gap funding can prove to be extremely beneficial to investors who need access to immediate cash while their long-term financing is pending. If you need capital to help cover expenses while you’re still awaiting your permanent loan, gap funding may be the right option for you. It’s also very helpful for investors who are taking on multiple real estate investment projects simultaneously.
However, while gap funding has assisted numerous investors in closing deals that they might not have otherwise, it is not without it’s faults. Like many things in the real estate industry, gap funding comes with its pros and cons, and should be used situationally on a case-by-case basis. Be sure to conduct proper research so that you can make an informed decision on whether or not gap funding can assist you in your real estate ventures.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.