Closing the Gap: Intro to Gap Funding
You can’t get to the profit from a sweet deal until you can properly fund the deal. Gap funding may be the solution.
Who’s Down With OPM?
In Gap Funding, a real estate investor turns to private money to bridge the “gap” between the total cost of a deal and the hard money funds available to them. This allows the investor to jump on a juicy project that they may otherwise be unable to (or unwilling to) access.
This gap arises because generally a hard money lender isn’t going to cover 100% of a project’s costs; they like borrowers to have some skin in the game, or it’s easy for a borrower to get in over their head. But, if you only work with Other People’s Money (OPM), or have a few projects going on at once, or simply don’t have the cash, it’s likely you’ll want help covering the various costs of purchase, closing costs, and renovations. This is where Gap Funding is the solution.
You can cover this gap from the first lender with a second lender, or maybe even three or four lenders. But how do you actually go about it, and what do you need to consider? Here are some tips for finding and closing Gap Funding.
Find Gap Funding
Networking and relationships is the best way to get access to fast and flexible private money. Family and friends is the easiest route, if in some ways the most fraught. Facebook groups, Mastermind groups, BiggerPockets forums, events and conferences are all ways to build those direct connections.
Present a Plan
Since a gap loan may be unsecured, or sit in a junior position in the event of a claim, smart gap funders do their homework. To secure gap funding, you may need to present an investment plan or proposal. The funder will likely assess the potential for profit, your experience, and your exit strategy. A well-defined exit strategy is crucial: lenders expect a clear plan for repayment.
Interest Rates & Terms
Gap funding typically comes with higher interest rates compared to traditional loans due to the increased risk involved. Terms can range from weeks to years, depending on the project, but most arrangements are based in months. Do your paperwork correctly. And make sure the gap funds are where they need to be at the right time: You don’t want to lose your deal from a delay.
Unlike many hard money lenders, none of Backflip’s loans are off-limits for gap funded deals. No need to hide the fact: it will likely come up in the asset review. Transparency is good. Just let us know that your capital is deployed elsewhere, so you’re bringing in a gap funder and we’ll go from there. By the same token, be sure to give your funder realistic expectations and regular communications, so they don’t start getting antsy. We’re all in this together.
Leave some Buffer
When you’re doing a flip, you can expect the unexpected. And when you have multiple projects underway, surprises can compound. Make sure you have built a margin of error into your plans, and leave enough gap money in the kitty to get the project finished even with the odd setback. Plan well and do flips!
This article is for informational purposes only and is not legal, financial or investment advice. To obtain advice tailored to your particular circumstances, you should consult a licensed professional advisor.