Gap Lending

[Jordan Geiman]

First time poster, long time reader. I find the information here amazing. I am completely new to this business, but feel I have studied a good amount about real estate investing.

A friend of mine has been doing real estate investing for about 18 months and has been moderately successful. I approached him with my interest in the topic and he shared some info and also asked if I may want to be a gap lender (or other avenue of lending) for some of his deals.

I thought it all sounded good and am now preparing for my first deal with him.

I am primarily concerned with my risk in this deal. He has a hard money lender that will be in first position and I will be the 2nd lien on the home, my total investment into the property is $25k.

The terms are that I receive 8% on my 25k if he pays me back within 90 days, 10% within 120 days, and 12% within 150 days. Is this fairly standard? I thought they were pretty good terms compared to my other investments outside of real estate.

But back to my main focus of this post, what are the necessary risks of this deal? I am going to have my lawyer look over the contract that my friend and I will sign. I will have a 2nd position lien on the house. I know my friend has rental homes and a few other properties of equity. So bottom line... is this a fairly secure investment to test the waters for me into this space?

Is there anything in particular I should make sure is in the contract?

The house itself seems like a great deal to me, the numbers check out, the comps all made sense, and the DOM for the comps were relatively quick.

Thanks!

[Jon Holdman]

1) Give us the numbers. You say you think the make sense, but you don't actually provide them.

2) Second position? For 8%? No way. Not even for 18% paid in weekly installments.

Standard is on the order of 15% plus some points for up to 70% of the ARV or (purchase plus rehab) for a more conservative lender.