The concept is pretty simple, the less of your own money you spend, the higher your profits. If you are in the rehab business, you’ll need a way to ‘bridge the gap’ between a 100 LTV loan and the cost of actually rehabbing your property.
Gap funding is like taking out a second mortgage on an unfinished rehab project. Which is risky for both sides in this equation. Whoever gives you gap funding is playing second fiddle, if you default they get paid back after your first lender, which means they might never recover the money they give you.
For this reason, gap funding will likely you cost 5-8 percent more than your initial 100 LTV loan. Given this added expense who would want a gap financing in the first place?
A hypothetical developer is eying a vacant strip mall, right in the center of an up and coming shopping district. The property is a steal, listed at 300 thousand which is pretty cheap for a strip mall. His hard money provider doesn’t shy away, offering him the full 300 thousand to purchase the property, at a standard interest rate of 14 %.
But the interiors are scarred black from a recent fire, and every unit will have to be gutted and equipped with new walls, electrical, the works. All this will cost him a pretty penny, 300 thousand, essentially the cost of constructing a whole new building.
Our developer doesn’t have 300 thousand dollars just lying around, but the cost of gap financing seems painful at 24 % interest. Our developer gets in touch with a great contractor and together they work out a plan to complete work in 4 months
So he bites the bullet and takes on a gap loan. Let us assume everything goes according to plan.
In four months, the once blackened interiors are sparkling, full of marble appointments and glowing fluorescent lights. The chic location of the property means it resells for a cool 1.2 million.
He’s carried the loan for four months; basic interest calculations put the cost of both his loans at 623,754 minus the 1.2 million selling price, well 576 grand is nothing to sneeze at, his profits more than make up for the expense of his gap loan.
He had the full purchase price covered, and the cost of the rehab covered as well.
What did this hypothetical developer do to make the most of gap funding? The first thing was he had a plan, that was clear which enabled him to finish the work as soon as possible. By working as fast as possible, our developer minimized the expense of both loans.
Not only was he able to fully finance the purchase of the property, but he also didn’t spend any money on the repairs, all of this allowed him to earn a half million in profit. Without gap financing, he’d have made 300 thousand dollars less.
Who doesn’t want to spend anything and earn half a million dollars? If your initial loan on your next investment property falls a bit short, don’t let the expense of gap financing scare you. Gap funding is perfect for, confident and experienced real-estate investors who can complete a project quickly.
Level 4 Funding LLC
Hard Money Lender
Hard Money Loans
Hard Money Loan
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis Dahlberg Broker/RI/CEO
NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave | Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 43 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.