Gap funding

3 Replies

It depends on what exactly you are referring to with gap funding. I have heard it used different ways.

I have used a version of gap funding where the hard money lender funds 85% of the flip (purchase + renovation) and the gap funder funds 10% of the deal. That leaves me with 5% to come from my own pocket. Some have used this method to obtain 100% financing. The key is that the gap funder is usually someone you know and have a relationship with. In my case it was someone who knew a friend of mine and that friend vouched for me.

In my opinion it is a great way to go if you have it available. It can increase your capacity to pull off certain deals.

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@Daniel Dubeck Gap Funding comes in many shapes and sizes. It can come from a personal investor who will negotiate terms, or potentially a piece of the equity. There are also 'mezz' lenders (typically for larger transactions) who will cover up to 90% CLTV and require you to bring the remaining equity to the deal, and additionally there is Gap Funding in the form of unsecured personal debt.

The latter can potentially be the most expensive option, but allows for true 100% financing as there are no restrictions for how to use these funds, as they are unsecured, and generally obtained through personal credit, income etc (since there is no collateral for obtaining these funds). Unsecured personal debt is often from institutional sources, but at rates of 9-20%, fully amortized over 3, 5, or 7 year terms (not interest only). This means sizeable monthly payments, but if utilizing with Value Add you can pay off the loan without a pre payment penalty at any time.

Hope this helps!