When to use gap funding and how to attract lenders.
A mortgage covers the bulk of the cost of purchasing a new property. But what about all the costs in-between?
There are some big price tags in real estate investment that bank loans won’t usually cover. You’ll still need to find a way to pay for your down payment, the fix-up cost, and any carrying costs for the property.
How do you fill those gaps?
What is Gap Funding?
Gap funding is the money source you use to cover these extra costs in real estate. Private individuals can lend money to fill the gaps in your investment.
All real estate investors at any stage can utilize gap funding. Typically, gap funding is most useful to investors just starting out, who haven’t yet made or saved enough money to fund their own investments entirely.
However, we also see people who are already multimillionaires with years of investing under their belts use gap funding. It’s a great way to leverage investments at any level.
Where Do You Find Gap Funding?
You might find a few banks and other lenders who do gap funding, but the main way to get it is through OPM, Other People’s Money – think of it as Real People’s Money.
These people can be family, friends, or members of a real estate group. These people don’t necessarily have enough to fund your entire flip, but do have $20,000 to $50,000 sitting in an account or IRA. They don’t want to do the actual work and risk of investing, but they do want the potential for a higher return on their money than they’d get from a bank.
How Do You Get Gap Funding?
Getting people to loan you their money may sound easier said than done. After all, OPM is often either secured by second-lien or unsecured, so you wouldn’t put your money in that situation with just anyone.
There are a few key traits you’ll need to show to attract the people who can provide you with gap funding:
- Respect their money
- Protect their money
- Be honest
Having these qualities will be the deciding factor in someone lending to you over another investor.
Respect Your Lender’s Money
Understand what your lender wants and expects out of the deal, and be sure they get it. Make them feel respected and confident with you handling their money.
Protect Their Money
Treat the money professionally – even more carefully than you’d treat your own cash. Be diligent in arranging the proper liens, proper insurance, and proper documents.
Tell your lender everything that happens with your project. They have a right to know what they’re investing in. It’s better to be straightforward and allow your lender to make their own decisions than to keep secrets about the deal until it comes back to bite you.
Grow Your Funding
If you make your lender feel good after the first transaction, they’ll want to come back for another. Good deals can lead to a web of funding. A lender who has a good experience with you will tell their family and friends that you’re a good person to lend to.
Respecting, protecting, and being honest with your OPM helps you grow. Investing is much easier with gap funding covered by OPM, and it’s possible to someday fund entire projects with OPM.
Learn More about Gap Funding and OPM
If you’re interested in growing your real estate investment business, check out the following resources:
Download our free OPM checklist at this link.
Learn more about gap funding and OPM with these videos.