Gap Funding

Gap Funding For Real Estate Investors

May 2, 2024

Produced by:
Elizabeth Welgemoed

Elizabeth is a Senior Content Marketing Manager with over 10 years of experience in the field. Having authored or edited 1,000+ online articles, she is a prolific content producer with a focus on the real estate vertical.

A gap lender provides funds required for renovation jobs that hard money lenders or other real estate lenders don’t cover.

Obtaining gap financing permits property investors to finish a job without utilizing any of their own funds, yet still make money from it and in most instances make much greater returns on their investment. In essence, a gap funding loan is a short term loan that investors use to solve the cash flow challenges that arise when flipping a house, or completing fix-to-rent deal.

The concept of “real estate gap funding” is a crucial part of the investment concept of using “other people’s money” (OPM) in order to fund real estate deals. Gap financing provides the difference between the borrower‘s primary loan and the investor‘s available cash on hand. This process enables real estate investors to renovate a residential property without making any financial sacrifices of their own as a borrower.

Unlike permanent financing options, gap loans are typically set up in a junior lien position, sometimes subordinate to a bridge loan, and are a common part of real estate investing. The ultimate goal of the real estate investor is to identify an opportunity to make a profit, handle the building project, manage all the administration, and finally, to sell the property for a price that delivers maximum return on investment.

3 Primary Ways Investors Use Gap Funding To Their Benefit

  1. To quickly flip a property or complete a buy and hold investment
  2. Save an investor-owned property and the equity in the property, from impending loss due to an imminent foreclosure, past due liens, court judgment, or to get the property out of probate.
  3. Help cash-poor investors make pre-listing improvements to a run-down property to bring it up to code or make cosmetic changes (paint, landscaping, curb-appeal products), to sell it quicker, and get the chance to garner a higher asking price.

How To Get A Gap Loan?

Investors should explore their various lending options before committing to a gap loan for their real estate investment. Those who choose a traditional lending institution for borrowing will apply for it just like a traditional loan.

As gap funding is technically riskier for lenders, investors will need to convince the gap lenders that their investment would be profitable, secure, and worth the purchase price .

Gap loans bridge the cash gap between what the investor needs to complete the project, and what they actually have available. The benefit of taking a gap loan is that they can be organized typically at short notice and within a couple of days in the event of a crisis. In most instances, a business owner can utilize the loan to put a deposit down for a property deal, up until long-term financing can be secured. Likewise, a Gap Loan can be practical in the case of the auction so that borrowers can put an offer on a property with some financial assurance.

In general, a gap loan is a secured loan. It requires a debtor to put up security to obtain the loan. Investors can put commercial property, development sites, land, auctioned properties, residential properties, retail stores, or any other property as security for the loan. As long as they don’t make the mistake of getting behind on payments, this method is perfectly acceptable for real estate funding.

Usually, gap lenders provide loans up to 65% of the value of the property that is kept as a security versus the loan. However, gap lending can depend on a variety of factors more than just what the investment property is worth.

Gap loans are usually interest-only loans. This means, in general, that the borrower is required to pay only interest during the life of the loan, and any profits from the sale of the property are typically used to repay the principal balance of the loan with the private lender.

Investors should be prepared to pay a higher interest rate on gap loans. Past relationships with loan providers can be a good way to obtain a solid gap loan and lower acquisition costs. If you are certain that you will be able to repay the gap Loan within 6 months, but you need access to capital fast, this is an excellent choice for you.

Even though nearly all gap loans are secured against the property, the lender will analyse a borrower‘s credit score to decrease the risk of lending money to someone that could potentially default on their loan.

How To Find A Gap Loan Provider

Multiple lending institutions in the real estate market can offer you a gap loan . However, it is best to search for certified commercial lending institutions that can offer you the absolute best loan at advantageous rates and terms. Remember the lender you choose now could become your permanent solution for real estate financing in the future.

You can look for loan service providers online too. Simply search through different sites, fill out the online application, which is available on numerous lending websites. Collect loan quotes from different lending institutions that are readily available for complimentary or nominal charges and make sure to pay careful attention to cost obligations. Review thoroughly and compare them to each other and to regular loans secure the best terms.

In general, the real estate financing market is sizable, with a variety of lending institutions available for both experienced and novice investors alike. As such, look around and conduct sufficient due diligence to find the best gap funder.

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