Although there are a few types of GAP Funding, we will focus on the Real estate version in this BLOG.
Real estate GAP Funding loans are used as an interim loan to buyers with the down payment part of a real estate transaction. GAP Funding for real estate investing is becoming increasingly popular because of its ability to facilitate a high volume of deals while keeping more liquid cash reserves on hand.
GAP Funding is a private loan that covers the “gap” between the private or hard money loan and the full LTV of the project — some forms of GAP Funding can include everything from the down payment to the actual rehabbing and renovating, marketing the finished property, carrying costs, and selling the rehabbed home.
Gap Funding usually come with higher interest rates since they’re exposed to more risk. The private or hard money lender has the first lien position on the property, which means that they get paid first; the GAP lender has the second position. If the project fails and the house is foreclosed, the gap lender may not get paid at all. Some gap lenders may even ask for a share of the deal’s profits. This can also be considered a Joint Venture deal.
While GAP Funding can be a huge difference-maker for smaller investors, it’s a great tool for advanced investors, too. Investors who have all their capital tied up in multiple projects at various stages of completion often can’t afford to wait until the sale of one of these projects frees up money for subsequent investment. Gap Funding can let them seamlessly continue their investment cycle.
PROS
Fast and Accessible
Unlike a traditional bank mortgage which takes months to close and requires a ton of paperwork, gap funding can come through in a matter of days with very little analysis other than a look at the profit potential of the project.
A Difference Maker
Considering that hard money loans only cover around 70% of a house-flipping project, gap funding is often the difference between taking advantage of an investment opportunity and having to pass because of insufficient funding.
It’s Outside Money
Even though gap funding can be expensive, a lot of real estate investors only like to undertake investments using “other people’s money,” so they can maintain a liquid position. Gap funding can enable them to do that.
CONS
It’s Expensive
Gap funding can be very expensive — usually around a full percentage point more expensive than hard money loans. Interest rates on gap funding can sometimes top 10%, though keep in mind it’s an “interest only” loan, meaning that the borrower only pays interest over the term of the loan, and then pays back the entire principal at the end.
It May Not be Ideal for the Small House-Flipper
Gap funding comes with a lot of added fees, such as administration, appraisal, escrow, origination, and notary fees, among others. For larger-scale investors who have multiple projects moving through the pipeline, those costs are less impactful. For the investor flipping a single house, they could be prohibitive. Small-scale house flippers need to keep their costs down as much as possible, taking measures like using discount real estate agents, and doing some of the renovation work themselves.
ROC Financial Solutions offers a Down Payment GAP Funding option. See if your deal qualifies for GAP FUNDING.
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