Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 16%
$32.50 /mo
$390 billed annualy
MONTHLY
$39 /mo
billed monthly
7 day free trial. Cancel anytime
Buying & Selling Real Estate
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated over 4 years ago on . Most recent reply

User Stats

786
Posts
717
Votes
Ryland Taniguchi
  • San Francisco, CA
717
Votes |
786
Posts

Why Gap Funding Is Difficult

Ryland Taniguchi
  • San Francisco, CA
Posted

If I were to start real estate all over again with no credit and no money, I would start by getting awesome at finding deals. 

I systematically find deals by systematically driving for dollars. I have detailed my approach to marketing in other sections. We have direct mailers, door-knockers, secret niche strategies that few know about, etc. 

If you can find a great deal for a flip or BRRRR, you can borrow Gap funding from a private lender. If I were starting all over, I would do a HML first and get a 2nd gap fund at 20% and 5 pts.

But here is the challenge. On a 12% HML first, you maybe paying let's say 3 pts. Then if the project sells in 10-months which is not uncommon in my market where permits can take way too long, you pay an addition 4 pts in extension fees. You pay 1% per month in interest on the first mortgage. It costs 8% of ARV for every six months that you sit on hard money. Very little room for error. If you take out Gap funding at 20% and 5 pts, you room for error shrinks even further.

This is why I prefer BRRRR over flips. On a flip, the room for error is tiny. Speed and velocity are paramount. Very hard in my market where construction is in such high demand. On a BRRRR, I have 10-15 years for my returns and a couple of delays won't kill me.

Anyway, with a HML first and a 20% 2nd Gap funding the holding costs may eat up your profit if you don't turn that property fast. Your looking at a blended cost of capital around 24%.

When I run my hedge fund, we get a blended cost of capital of less than 5% using a credit facility/warehouse line based on Libor at 3.25% currently blended with the targe returns of the fund at 8% (10% to 11% if interest is compounded). From experience, it is hard to make money if your blended cost of capital is 24%.

Most Popular Reply

User Stats

155
Posts
23
Votes
Andre Key
  • Investor
  • Austin, TX
23
Votes |
155
Posts
Andre Key
  • Investor
  • Austin, TX
Replied

Would you provide financing for a downpayment on a seller finance deal including rehab cost?

Loading replies...