Real Estate 101: Understanding Gap Financing for Investors

Otherwise known as a “gap fund,” a “bridge loan” is a short-term loan intended to address an immediate financial need while securing longer-term financing. Gap financing is expensive and should be utilized primarily for short-term cash flow concerns, such as home renovations–an expense that a traditional lender doesn't cover.

Gap financing allows real estate investors to complete a project without spending their own money and still earn, sometimes at a higher rate. Gap finance is a short-term loan used by real estate investors to alleviate cash flow issues when flipping or fixing-and-flipping a home.

Read on to learn and understand gap financing for real estate investors today.

Gap Financing in Real Estate

"Real estate gap financing" is a critical component of financing real estate transactions with "other people's money." Gap financing bridges the financial gap between an investor's funds and the principal loan of a borrower. This allows real estate investors to renovate a home without having to make financial compromises.

Gap loans, as opposed to permanent financing options, are common in real estate investing and are subordinate to bridge loans. A real estate investor's goal is to locate profitable prospects, supervise the development process, and sell the property for the maximum return on investment possible.

Investors use bridge funds to quickly flip or buy and hold a residence, save an investment property from foreclosure, unpaid liens, court judgment, or probate, or assist cash-strapped investors in bringing run-down homes up to code or performing aesthetic upgrades in order to sell the properties more quickly and for a higher price. It is a useful short-term solution that could provide effective long-term results.

Applying for a Gap Loan

Investors should consider alternate funding options before acquiring a gap loan. The application process will be similar to that of a traditional loan. Hard money lenders and private money lenders must find investors in a variety of situations.

Because gap financing is riskier for lenders, investors must convince them that their business is profitable, secure, and worth the purchase price. Gap loan providers typically offer asset-based hard money loans. When providing a loan, asset-based lending considers the worth of the residence.

Gap loans bridge the funding gap between the demands and assets of an investor. Bridge loans can be issued quickly and within days in an emergency. The loan can be used to make a down payment on a house before long-term financing is obtained. A gap loan may be beneficial for auctions because it allows borrowers to bid confidently.

The Inner Workings of a Gap Loan

When a gap loan is secured, the loan demands collateral. Investors might use commercial real estate, development sites, land, auctioned assets, residential real estate, or retail buildings as loan collateral. As long as they do not fall behind, this method of real estate financing is appropriate.

Gap lenders often lend up to 65% of the property's worth as collateral. Gap lending is based on criteria other than the property's value.

On gap loans, just interest is paid. This means that the borrower only pays interest over the life of the loan, with the principal reimbursed by earnings from the sale of the property.

These loans have a higher interest rate. Relationships with previous lenders can assist you in obtaining a suitable gap loan and lowering purchase costs. If you can repay the gap loan within 6 months, this is a fantastic option for you.

Even if the majority of gap loans are secured by the borrower's property, the lender will consider the borrower's credit score to reduce the risk of default.

Conclusion

Sometimes, we are simply short of funds even during the times we are meant to accomplish real estate projects. Thankfully, with gap financing and gap loans, we can make our property investments worthwhile. Simply keep this solution in mind as you improve your real estate portfolio for years to come.

Are you looking for a private real estate lending company? Jaken Finance Group is here to offer you the right funding solutions for you. Give us a call today to learn more!