The gap funder provides funds required for renovation jobs that hard money lenders don’t cover. Obtaining this type of funding permits rehabbers and 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.
The concept “gap funding” is the crucial part of the investment concept of using “other people’s money” (OPM.) A gap loan provides the difference between the borrower’s primary loan and the investor’s available cash on hand. This is the vehicle that enables real estate investors or rehabbers to do complete a job without making any financial sacrifices of their own. Typically, gap loans are in a junior lien position, sometimes subordinate to a bridge loan.
As a rehabber or investor, this individual identifies the opportunity, understand the profit potential, handles the building project, manages the documents, and finally, the sales effort.
3 Primary Ways Investors Use Gap Funding To Their Benefit
- Depending on the financial calculations, quickly flip a property or buy/hold or fix/flip.
- 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.
- 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/or garner a higher asking price.
How To Get A Gap Loan?
Investors should explore their various lending options before committing to a gap loan. Those who choose a traditional lending institution for borrowing will apply for it just like a traditional loan. Those who work with either hard or private money loan providers will need to attract interested investors.
As gap funding is technically riskier for lenders, investors will need to convince the gap lenders that their investment would be profitable and secure. As a hard money loan, the capital received from gap loan providers is mostly asset-based more than anything else.
Gap loans work as a bridge to complete the cash gap. The benefit of taking a gap loan is that they can be organized typically at short notice and within a couple of days. In most instances, a business owner can utilize the loan to put a deposit down for a property deal, up until long-term funding can be secured. Likewise, a Gap Loan can be practical in 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.
Usually, gap lenders provide loans up to 65% of the value of the property that is kept as a security versus the loan.
Gap loans are usually interest-only loans. This means, in general, that the customer 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 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. If you are certain that you will be able to repay the gap Loan within 6 months, this is an excellent choice for you.
Even though nearly all gap Loans are secured against the property, the lender will do a thorough search relating to a borrower’s credit history to decrease the risk included in making the loan.
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.
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. Review thoroughly and compare them to secure the best terms.
In general, the financing market is sizable, with a variety of lending institutions available for both experienced and novice investors or rehabbers. As such, look around and conduct sufficient due diligence to find the best gap funder.