how do you get gap funding
Investor · grand prairie / st.louis, texas/ Missouri · Member since 2014 · 168 posts · 19 votes
how do you get gap funding
Most Popular Reply
Alex BreshearsBusiness Member
Lender · Springfield, MO · Member since 2020 · 351 posts · 504 votesThis is often mentioned because active investors are looking for this sort of product, and the reason there are not companies offering it is because of the amount of risk involved in doing this type of loan, especially in the current economic climate.
I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative. First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged. As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property. If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.
Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be. If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that upper 20% of equity.
Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.
You can also start building a network of private individuals that want to lend on your real estate projects by learning more about private lending. I am one of the coauthors for a book about private lending which you can read more about here: https://store.biggerpockets.co...
6 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes4y
@Jasmine Wilkes
Most likely best bet is to bring on an equity partner as most lenders will view it as too low a loan for the risk
7e investments53 Reviews - 4yMarty JohnstonPro MemberLender · Wauwatosa, WI · Member since 2016 · 571 posts · 204 votes
Quote from @Jasmine Wilkes:
im about to purchase this property and trying to find gap funding for an amount under 20k
@Jasmine Wilkes there are a few options ,but is this for a rehab/new construction/value add deal or rental? Gap funding at eat away at cashflow quickly depending the deal if being used to acquire a rental (no value add). Gap Funding is very well suited for rehabs and new construction as you can exit/payoff the gap loan without carrying the higher interest cost (ranges from 7-15% depending on a number of factors).
- Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes4y
Go talk to investors. Private money is everywhere, just have to find it
- Investor · grand prairie / st.louis, texas/ Missouri · Member since 2014 · 168 posts · 19 votes4y
Quote from @Marty Johnston:
Quote from @Jasmine Wilkes:
im about to purchase this property and trying to find gap funding for an amount under 20k
@Jasmine Wilkes there are a few options ,but is this for a rehab/new construction/value add deal or rental? Gap funding at eat away at cashflow quickly depending the deal if being used to acquire a rental (no value add). Gap Funding is very well suited for rehabs and new construction as you can exit/payoff the gap loan without carrying the higher interest cost (ranges from 7-15% depending on a number of factors).
yes i know that. its a rehab project
- Investor · grand prairie / st.louis, texas/ Missouri · Member since 2014 · 168 posts · 19 votes4y
Quote from @Chris Seveney:
@Jasmine Wilkes
Most likely best bet is to bring on an equity partner as most lenders will view it as too low a loan for the risk
thanks. seventy mortgage note are good equityy partners?
- 4yAlex BreshearsBusiness MemberLender · Springfield, MO · Member since 2020 · 351 posts · 504 votes
This is often mentioned because active investors are looking for this sort of product, and the reason there are not companies offering it is because of the amount of risk involved in doing this type of loan, especially in the current economic climate.
I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative. First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged. As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property. If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.
Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be. If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that upper 20% of equity.
Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.
You can also start building a network of private individuals that want to lend on your real estate projects by learning more about private lending. I am one of the coauthors for a book about private lending which you can read more about here: https://store.biggerpockets.co...
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