Tag Archive for: gap funding for real estate investors

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How to Calculate Gap Funding

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When your loan doesn’t cover 100% of your project, how do you calculate gap funding?

How much do you need for gap funding? It depends on each project.

Calculating Gap Funding Needed for a Project

The way to figure out the gaps in your project is simple:

(Cost of Property + Rehab Costs) – Hard Money Loan Amount = Gap Funding Amount Needed

If the property costs $200,000, but your lender gives $140,000, there’s a $60,000 gap you’ll need to cover. You can:

  1. Pay the $60,000 out-of-pocket

Or

  1. Bring in a gap lender, enabling you to buy the property with 100% financing. You would likely use part of this loan for the down payment and part for construction costs.

How to Calculate Construction Costs

Most hard money lenders use the ARV (anticipated retail value) rather than LTV (loan in relation to the current sale value).

In case your loan is for LTV only and doesn’t take into account construction costs, here’s how you would calculate those costs for an undermarket home:

ARV  –  Actual Cost of Property  =  Maximum Construction Budget

It’s important for you to work these numbers and know your budget up-front. Keep in mind, it’s always better to err on the generous side with your numbers. You want to be sure you can get done on-time and within the budget allotted by your hard money and gap lenders.

How much you’ll spend on construction is important when you calculate gap funding.

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What Is Gap Funding for My Real Estate Investments?

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In the real estate investment world… What is gap funding?

You should never count on a bank or hard money lender to give you a loan that will cover 100% of your real estate investment property.

What you should be able to someday count on, though, is your gap funding.

So, what is gap funding?

Definition: What Is Gap Funding?

Gap funding is the money you bring in from another source to fill any gap left between the lender and the project costs.

If a lender offers you 70% of the LTV on a property, gap funding is how you fill in the remaining 30%. Usually, you secure gap funding, although unsecured gap funding is possible.

A “secured” loan means that the debt is backed by a piece of collateral. In a typical gap funding scenario, the loan is secured by the property being purchased.

For the most part, you won’t be able to find a gap lender at an institution like you can a bank lender. Instead, gap lenders are family members, friends, or someone you know.

OPM vs Gap Funding

You can use a couple gap funding terms interchangeably:

  • gap funding
  • gap lending
  • OPM (other people’s money)
  • real people’s money

All of these terms get at the same concept. It’s money, not from you and not from an institutional lender, that covers whatever costs of an investment property that your lender won’t fund.

OPM can cover up to 100% of a deal, but for now, we’ll be talking about it in a strictly gap funding sense. These are loans that fill in the holes of a project that a mortgage or hard money loan wouldn’t cover.

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Gap Funding for Real Estate Investors

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So, bridge loans are different from hard money loans. But where does gap funding fit into the mix for real estate investors?

Gap Funding vs Bridge Loans

Typically, true “bridge” loans are used for three specific situations in real estate investing:

  1. When you’re buying a new property and already have one listed for sale
  2. When you need to cover down payment on a new property
  3. When you find a great deal but your bank’s financing won’t be ready in time.

Bridge loans are about getting you from one property to another. Gap funding is more about filling in the gaps within a single project.

What is Gap Funding in Real Estate?

Bridge loans do bridge “gaps” in your investments. But “gap funding” is something different.

Gap funding is the small amounts that investors need throughout the course of a project in addition to the bigger loan. Examples of common gap funding situations are:

  • Down payments
  • Contractors and other fix-up costs
  • Carry costs before renting or selling
  • Interest, insurance, and other payments not included in the original cost of the property.

A bank or hard money lender will be funding the majority of your project. And when you don’t have other properties, you can use a lien (like you would for a bridge loan). But without another property, you need gap funding to cover the little costs that slip through the cracks of your primary financing.

Gap funding for real estate investors can be a loan that’s anywhere from $10,000 to $100,000. Whatever costs your primary loan and your own cash won’t cover will need to be filled by a gap lender.

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