Where to find gap funds?

[John Keane]

I would say I have 5 people in my network that would be interested/capable of investing at this scale, and I am starting by reaching out to those individuals.  However, in the off chance that I am not able to cover my gap funds (est. $200-$300K) from that small circle, how would you recommend I start branching out? Obviously I can start pitching every person I come across, but my goal with this post is to be as efficient and particular as possible with who I contact.

Context: This is for a single family flip in the San Diego market. I have not selected a specific property yet, but want to at least identify my potential investors. I have a hard money lender established to cover 80% of the purchase and 100% of the rehab, so my capital partners would be covering:

• 20% of the purchase price
• Range of $30,000-$50,000 cost of capital
• 25% of the renovation budget (to kickstart the project while waiting for reimbursements)
• $25,000 contingency pad

Any tips would be great, and if you happen to be interested yourself I can send you more details. The structure would be a 75/25 profit split with projected returns of 10-15% on your money in 4-5 months.

[Stuart Udis]

@John Keane A few comments:

-If you aren't able to raise the funds from your closest friends and family it is unrealistic to believe you will be able to raise the money from anyone more distant to you. Especially if you are new to real estate investing. 

-As noted, splits are off. When I first began investing and relied on friends and family investors I was normally in the 30/70 split range. Now my investor network as expanded and the best split I have experienced was 65/35 in my favor but I invested 40% of the cash and created over a million in imputed equity before any investor dollar was raised allowing me to originate a bank loan at 87% LTC. I ended up having to raise only a $950,000 for a $10M project. That's the type of effort it takes from a GP if you want to see more favorable splits and even there I was unable to reach your intended 75/25 objective. Hope this tempers your expectations. 

-It doesn't appear you are contributing any of the equity. Most equity investors will want to see you investing alongside. 

-Why not include a contingency line item in your construction loan rather than raise the contingency funds from your equity partners? Debt is less expensive than equity.

-Why a hard money loan as opposed to a bank loan? If you are going to raise equity, you appear stronger if you can originate bank debt at a lower cost than alt. lenders. This directly impacts returns for everyone. If you conclude the leverage is so good that everyone comes out ahead that's fine but if you are only able to originate hard money debt that may be viewed as a red flag by investors who will question your experience and borrowing strength.