Tag Archive for: gap funding

Top 5 Hard Money Loan Options

What types of hard money loan options are out there for real estate investors?

Hard money (sometimes called private money) loans are often the key to getting started in real estate investing. 

Most hard money lenders have a lot of options and many even have particular specialties. This article explains what’s out there so you’re equipped to have discussions with lenders.

Here are the top five loans that you’ll encounter in the hard money industry.

1. Fix and Flip Loan

The nice thing about a fix and flip loan is that it has everything to do with the property. Even if you’re less experienced as an investor, if the property has potential, hard money lenders will listen.

If the value is there, hard money lenders could fund up to 100%.

2. Bridge Loans

You’ll typically use a bridge loan to either purchase or refinance a project. There are a few places where they generally show up:

Bridging Gaps Between Projects

If you’re currently working on a project but you come across another great deal, a bridge loan can tap into that equity. You can use this money this as an opportunity to efficiently line up your next project.

A bridge loan would put a small lien on a property that’s about to go up for sale (or is currently being sold) which gives you money to purchase your next project.

Finishing and Buying Properties

Hard money moves more quickly than large, standard bank loans. If the clock is ticking and you need to either pay or lose the deal, a hard money bridge loan can save the day.

Wholetailing

Bridge loans can also work as a crucial part of wholetailing. Wholetailing involves anything from purchasing a discounted property and performing basic fixes to outsourcing renovations altogether. 

Typically, wholetailing only requires simple funding, often 60-90-day loans.

3. Gap Loans

You can explore gap funding to cover all sorts of money holes that might show up as you go through a project:

  • Down payments
  • Getting a project started (consider funding for escrow draws)
  • Completing a project
  • Carrying project expenses (like HOA fees)

You can even use gap loans to pay off old investors if you have someone who’s ready to move on. Treat your investors well and make sure you have the financial flexibility to let them out if they need.

4. Usage Loan

A usage loan is a private non-reporting loan that helps you pay off your credit card balances. If you’re using your personal credit card for business, this can be an important way to raise your credit score.

Real estate investing is all about leverage, and a lot of banks see your credit score as a reflection of your ability to use leverage well. 

The higher your credit score, the better terms you’ll often find for loans. 

5. BRRRR “Buy” Loan

The two big ticket items in the BRRRR method are 1) the purchase, and 2) the refinance.

Hard money loans come into play on the purchase side of a BRRRR. Because hard money is so flexible, it can also often fund a good portion of the rehab. 

Questions?

These are the top five hard money loan options, but if you’re looking for something else, just ask! Remember, hard money lenders are often smaller companies and individuals. They all have preferences and specialties, so get to know them and let them get to know your project.

If you’re interested in learning more, check out the free tools on our website or our YouTube channel where we discuss other tips and tricks for successful investing.

You’re always welcome to reach out to us at Info@HardMoneyMike.com if you have any questions or would like to discuss a deal.

Happy investing!

What Is Gap Funding? (What to Do When Your Main Loan Leaves Gaps)

What is gap funding? Let’s go over 4 types of small loans: bridge, reserves, rehab, and usage.

The gaps lenders leave on real estate projects are getting bigger.

They’re asking you to put more money in. Leave bigger reserves. Have better credit scores.

We see this daily as we help clients with small loans. Let’s go over some of these small loans that we call gap funding:

  • Bridge loans
  • Reserves
  • Rehab costs
  • Usage loans

Bridge Loan Gap Funding

Bridge loans: if you have a project that’s either on the market or going on the market, but you need to get into your next project. You have to keep making money, but your capital is tied until that first property sells. 

These bridge loans are usually between $10,000 and $75,000, used for a down payment on your next project.

How it works: you put a lien on both properties, then when the first one sells, you pay off the bridge loan. This can keep you going from flip to flip with no pause in projects.

Reserves

Another spot in the real estate investing process for gap funding is reserves. Banks are requiring more money in reserves to cover any unknown expenses or payments.

We just did two loans to help with reserves. 

One was for a flip. Someone needed to borrow money. They had a property on the market. They’re buying their next one, but the lender that was funding their new deal required six months of reserves. We did put a second mortgage, on the property. When it sells, we’ll get paid off, and they’ll be onto their next deal. 

The second was an investor who needed reserves for a long-term loan. He was refinancing his investment property, but he was short on reserves. We were able to use another property in his portfolio to do a loan. Once the cash-out refinance is done, he’ll pay us back.

Funding Gap in Rehab Budget

Maybe your primary loan didn’t cover as much of the fix-up process as you ended up needing. This is another instance where gap funding comes in handy.

We also had another unique situation with a client recently. The borrower got the money in their escrow account when they set up the loan… but the lender would not release any escrow funds until he did at least a quarter to a half of the project. Yet he couldn’t start the project because he needed the funds from the escrow.

We stepped into this chicken-and-the-egg situation and helped him with a lien on another property to give him the funding he needed to kick off the project. When his other lender released the escrow, he was able to pay us back.

Usage Loans

Sometimes the requirement from banks that kills investors is the credit score limits. For many investors, this means their credit usage is too high – since they use lines of credit for their real estate projects.

We had a client out of Michigan who was trying to get a DSCR loan. He bought a property, fixed it up, and was going to do a DSCR refinance to get all his cash back.

But he used all personal credit cards for the project. This tanked his credit score. So when he applied for the DSCR loan, he was at an almost 10% interest rate with 3 points.

To help him, we did a quick usage loan to pay off those credit cards and let his credit score go back up. Then he can get into a long-term loan at a good rate with fewer fees.

Other Small Loans for Gap Funding

We’re able to help people in any of these circumstances who need a small gap funding loan.

In fact, in any situation where you need a loan and have a good property to put a lien on, we may be able to help you.

If you have any questions on this or other loans, reach out to Info@HardMoneyMike.com.

Happy Investing.

How to Save a Stalled Real Estate Project

A good deal can still create a situation with a stalled real estate project. Here’s how to save it.

One of our favorite loans is the type that fixes a stalled project.

Stalled real estate projects most often happen when:

  • You run out of money before you run out of work to do, so the house can’t get on the market.
  • A refinance on a flip doesn’t work out, but the original high-interest loan designed for the short-term loan is racking up payments.

This situation accumulates interest, taxes, and other carry costs that you were not anticipating.

We love saving these stalled real estate projects. We don’t care if our loan is in second, third, or fourth position, as long as we see the deal coming through.

Let’s go through a couple examples of times we’ve recently helped clients with stalled real estate projects.

Funding the Escrow on a Stalled Real Estate Project

For this client, we funded him money in escrow to fix up a property.

He had another lender first. It was a big, national fix-and-flip lender who had a lot of money sitting in escrow for him. But, they wouldn’t release any money until he got his other properties finished first.

This client had a lot of other properties going at once, so he didn’t have the cash flow to fund this one. He also didn’t want to sit on his new property, waiting until his lender decided to give him his cash.

After four months of fighting, he decided to get a loan through us instead. We were able to fund the whole thing. We used a lien on another property of his properties to fund the whole escrow.

Now, he’s able to get this property done and on the market in time for spring. Once he sells, the other lender will release his funds, and he’ll be able to pay us back.

Funding an Over-Budget Fix and Flip

One of the most common stalled real estate projects we see: a fix-and-flipper runs out of money.

  • The budget was too low to begin with
  • The flipper got priced out of material and labor costs.
  • An expensive surprise was found in the house that wasn’t accounted for in the original budget.

We had a client come to us recently in this exact scenario. He knew he needed an extra $20,000 to $25,000. He wasn’t completely sure which.

He’s hoping it’s only $20k, but we gave him a loan for $25k anyway. This allows him to:

  • Not piecemeal a budget (getting a couple thousand funded here, a couple thousand there, etc).
  • Finish the project faster.

Now, he won’t miss the springtime market.

Why We Do Loans on Stalled Real Estate Projects

We’re glad to help real estate investors when money for projects falls just a bit short.

Anytime you have a good project or a good loan-to-value, us lending to you makes a win-win for everyone.

Need a small loan to finish a stalled project? Reach out to us at Info@HardMoneyMike.com, and we’ll see how we can help!

Text: "How to Secure a Gap Loan"

Ways to Secure a Gap Loan & How to Do It

For your lender to feel comfortable, you need to know the ways to secure a gap loan.

When you hear the advice to “secure” your gap loan, what does that mean? How do you secure a gap loan? And why?

Ways to Secure a Gap Loan with Two Lenders

Securing your loan involves both your hard money lender and your gap lender.

Your friend or family member is giving you a fairly large chunk of money. They’ll want to know how you’ll secure it for them.

Securing your gap lender’s loan involves putting a lien on the property. Does your hard money lender allow this? Not all lenders will.

If Your Hard Money Lender Doesn’t Allow a Lien

If your hard money lender does not allow a lien on the property, you’ll have to secure the loan with a different property.

You could either put the lien on your own home, or you could use another rental or investment property.

If They Do Allow a Lien

If your hard money lender does allow a lien on the property to secure a gap loan, it’s best to do during closing with the mortgage and deed. This way title records it, and you have evidence for your gap funder that it’s recorded.

Many gap lenders – especially if they’re family or friends – won’t be educated enough about the real estate world to understand how to secure  their money. As the investor, it’s your responsibility to keep your lenders’ money safe.

Securing the Gap Loan

No matter which property has the lien, you’ll have to take a few important steps to secure the gap loan.

You’ll need a note – a promissory note between you and your gap lender – and a lien, either a mortgage or a deed of trust. And you’ll have to record all this with the county.

To make sure the loan is concerned, be sure to check all these boxes. It’s important to do this thoroughly so your lender will:

  • Get their money back
  • Feel comfortable with the deal
  • Want to lend to you again
  • Recommend you to their network

Read the full article here.

Watch the video here:

Text: "How Much $$$ For Gap Funding?"

How to Calculate Gap Funding

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.

Read the full article here.

Watch the video here:

Text: "Gap funding for BRRRRs"

How to Use Gap Funding for BRRRR Projects

Gap funding is a way to get $0 down BRRRR properties!

You should use gap funding for BRRRRs the same way you do fix-and-flips. The biggest differences happen at closing.

Similarities to Fix-and-Flips

Gap funding is used very similarly for both BRRRR and flips: for down payments, construction costs, or carry costs.

The bulk of the money not covered by a hard money lenders becomes the down payment. Most lenders require at least 10% for this cost.

Your primary loan does not always cover construction costs – rehab, repair, or anything necessary to bring the house up to the ARV and onto the market.

Also, some investors like to use gap funding for the carry costs of the project: the mortgage payment, the insurance, and all other monthly costs.

Gap funders can (and should) be used for all these phases of your BRRRR project.

Gap Funding Process During BRRRRs

Use BRRRR gap funding like fix-and-flip gap funding: for down payment, construction, or carry costs.

For BRRRR though, you need to close the gap funding loan on the same day as closing. You’ll also need to be sure you close the gap funding at the title company, with your lender. So you’ll need to know in advance that your hard money lender allows gap funding with a lien on the property.

Protecting Your BRRRR Refinance While Using Gap Funding

If you close your gap loan too late or incorrectly, your long-term lender can consider your refinance cash-out, not rate-and-term. This will lower the LTV on your refinance.

It’s important to get the money for your loan back in the refinance. In a good BRRRR transaction, you walk away with a house that’s cash-flowing and little to no money out of your pocket.

Read the full article here.

Watch the video here:

Text: "Gap funding for a fix-and-flip"

How to Use Gap Funding for Your Flips

Don’t walk into a loan without a plan – use gap funding for flips!

During a time when lenders are offering less money up-front for investment deals, you might need more money to fill in the gaps on your fix-and-flip projects.

Here are a few phases where you might need gap funding on your project.

Down Payments

Hard money lenders require at least 10% as a down payment. This is a very common use for gap funding.

If you use gap funding for your down payment, you’ll need to find out right away whether or not your hard money lender will accept a secured gap loan on the property.

Construction Costs

Another way to use gap funding for flips is for construction costs – rehab, repair, or anything necessary to bring the house up to the ARV and onto the market. These expenses can rack up fast, and they may not be completely covered by the main loan for the flip.

Carry Costs

Some investors will only use gap funding for the carry costs during their flip.

The lender will pay the mortgage payment, the insurance, or whatever other monthly costs are required during the project. Having a gap lender for carry costs can smooth out a fix-and-flip experience.

The Reach of Gap Funding for Flips

It’s possible to coordinate with your gap lenders to cover all three of these additional costs. This is a common way investors successfully finish fix-and-flips with zero money down.

You can use gap funding however you need, as long as both the hard money lender and the gap lender agree that the loan fits their criteria.

Not all hard money lenders allow you to secure your gap loan with a lien on the property you’re closing on. And not all gap lenders will loan to you unsecured.

Read the full article here.

Watch the video here:

Text: "Gap Funding"

What Is Gap Funding for My Real Estate Investments?

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.

Read the full article here.

Watch the video here:

Text: "Gap Funding & Hard Money How They Work Together"

Gap Funding and Hard Money – How the Real Estate Lending Options Work Together

How do gap funding and hard money go together?

As we move toward a recession, your money as a real estate investor will tighten. Lenders who used to give you 90% of the value of a property will now only offer 80% or less.

Where will you come up with that extra 20% or more? Is real estate in a recession only for those of us with hundreds of thousands of dollars sitting around?

Not at all. Lenders tightening only means that gap funding will become more important for real estate investors.

Let’s look at what gap funding is, how to apply it to your upcoming purchases, and how it integrates with a hard money loan.

What Is Gap Funding?

What does “gap funding” mean in the real estate world?

Gap Funding Definition

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 gap funding is secured, 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.

Gap Funding for Flips

During a time when lenders are offering less money up-front for investment deals, you might need more money to fill in the gaps on your fix-and-flip projects.

Here are a few phases where you might need gap funding on your project.

Down Payments

Hard money lenders require at least 10% as a down payment. This is a very common use for gap funding.

If you use gap funding for your down payment, you’ll need to find out right away whether or not your hard money lender will accept a secured gap loan on the property.

Construction Costs

Another way to use gap funding for flips is for construction costs – rehab, repair, or anything necessary to bring the house up to the ARV and onto the market. These expenses can rack up fast, and they may not be completely covered by the main loan for the flip.

Carry Costs

Some investors will only use gap funding for the carry costs during their flip. 

The lender will pay the mortgage payment, the insurance, or whatever other monthly costs are required during the project. Having a gap lender for carry costs can smooth out a fix-and-flip experience.

The Reach of Gap Funding for Fix-and-Flips

It’s possible to coordinate with your gap lenders to cover all three of these additional costs. This is a common way investors successfully finish fix-and-flips with zero money down.

You can use gap funding however you need, as long as both the hard money lender and the gap lender agree that the loan fits their criteria. 

Not all hard money lenders allow you to secure your gap loan with a lien on the property you’re closing on. And not all gap lenders will loan to you unsecured.

Gap Funding for BRRRR

Gap funding is also used for BRRRRs, and works much like fix-and-flips. The biggest differences happen at closing.

Gap Funding Process During BRRRRs

BRRRR gap funding can be used the same way as a fix and flip: down payment, construction, or carry costs.

For BRRRR though, you need to close the gap funding loan on the same day as closing. You’ll also need to be sure you close the gap funding at the title company, with your lender. So you’ll need to know in advance that your hard money lender allows gap funding with a lien on the property.

Protecting Your BRRRR Refinance While Using Gap Funding

If you close your gap loan too late or incorrectly, your long-term lender can consider your refinance cash-out, not rate-and-term. This will lower the LTV on your refinance.

It’s important to get the money for your loan back in the refinance. In a good BRRRR transaction, you walk away with a house that’s cash-flowing and little to no money out of your pocket.

How to Calculate Gap Funding

How do you calculate what you’ll 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.

Ways to Secure a Gap Loan

So when you hear the advice to “secure” your gap loan, what does that mean? How do you secure a gap loan? And why?

Securing with Two Lenders

Securing your loan involves both your hard money lender and your gap lender.

Your friend or family member is giving you a fairly large chunk of money. They’ll want to know how you’ll secure it for them. 

Securing your gap lender’s loan involves putting a lien on the property. Does your hard money lender allow this? Not all lenders will.

If Your Hard Money Lender Doesn’t Allow a Lien

If your hard money lender does not allow a lien on the property, you’ll have to secure the loan with a different property.

You could either put the lien on your own home, or you could use another rental or investment property.

If They Do Allow a Lien

If your hard money lender does allow a lien on the property to secure a gap loan, it’s best to do during closing with the mortgage and deed. This way title records it, and you have evidence for your gap funder that it’s recorded.

Many gap lenders – especially if they’re family or friends – won’t be educated enough about the real estate world to understand how to secure  their money. As the investor, it’s your responsibility to keep your lenders’ money safe.

Securing the Loan

No matter which property has the lien, you’ll have to take a few important steps to secure the gap loan. 

You’ll need a note – a promissory note between you and your gap lender – and a lien, either a mortgage or a deed of trust. And you’ll have to record all this with the county.

To make sure the loan is concerned, be sure to check all these boxes. It’s important to do this thoroughly so your lender will:

  • Get their money back
  • Feel comfortable with the deal
  • Want to lend to you again
  • Recommend you to their network

For More Help on Gap Funding and Hard Money

Gap funding and hard money are big, important concepts that work together for real estate investors.

If you’re left with questions, you can reach out to us at info@hardmoneymike.com, on Facebook, or at HardMoneyMike.com. 

We’re more than happy to answer specific questions on specific deals.

You can also check out these videos on gap funding and OPM.

Happy Investing.

Text: "Finding Gap Lenders"

Where Do You Find a Gap Lender for Real Estate?

Gap lenders aren’t exactly like hard money lenders. You can’t walk into a gap lending institution and ask for a loan. So where do you find a gap lender?

Who are Gap Lenders?

There are some hard-money-style lenders out there that focus on gap funding, but they’ll charge you a 12 – 20% interest rate. The best place to find reasonable gap funding is with ordinary people.

Traditionally, gap lenders are people you meet – family, friends, people in real estate groups, or anyone with money who wants to dip a toe into real estate investing. These people have a couple tens of thousands of dollars they’d like to make a better return on.

Half the people in real estate groups want to be real estate investors, but don’t want the burden of managing an entire project. Gap funding is secured with a lien against the property, so lending is safer than investing.

Gap lenders tend to have around $50,000 to $60,000 they’d like to put toward real estate. Not enough to do a full transaction, but perfect to fill the gaps your financing will leave on your flip.

Where Can You Go to Find Gap Lenders?

How do you find a gap lender? Get involved in the real estate community, and keep your eyes and ears open. Go to meet-ups. Talk to people with money.

A lot of how to find gap lenders boils down to: How do you convince them to give you moneyHow do you set up the lending relationship?

If you have questions on how to find and approach gap funders, you can watch these videos, use our OPM checklist, or reach out at HardMoneyMike.com.

Read the full article here.

Watch the video here: