When funding commercial real estate, acquisition or construction, there’s typically a requirement to inject cash into the deal. For instance, if you wish to renovate and sell a $5 million office building, your typical funding would require you to put up the cash. This type of loan usually ranges from 20% to 40% cash into the deal. And this loan is also known as a first-position construction lending. But, if you would like to deduct your cash down payment’s amount, getting gap funding from the Hard Money Loans is the best solution!
What Is Gap Funding?
Gap funding is essentially a temporary loan used to provide finance for an individual until they can secure a more permanent solution. Also known as a bridge loan, this down payment gap funding is traditionally used to “bridge the gap” between the moment a borrower needs money and when they can secure a long-term loan. It is a great tool for anyone who needs access to capital while they are waiting for a subsequent lending to emerge. That’s why more and more real estate investors are taking advantage of gap funding.
But What Is Gap Funding For Real Estate?
Most real estate investors trust in private money or hard money loans for future deals. But, it’s uncommon for the most private and hard money financiers to cover the entire cost of the acquisition and fix. Most lenders can only lend a percentage of the price or after-repair-value (ARV) – usually somewhere around 70% of the home’s value. As a result, most borrowers need to secure additional funds; that’s where second position gap funding comes into play.
Gap money for real estate shareholders may cover the difference between the original hard money loan and the remaining cost obligations. This means this type of loan can cover the rest of the acquisition costs, plus the costs earned from fixing, marketing and selling the property. Additionally, commercial gap funding lenders may also require borrowers to deliver a percentage of the deal’s resulting profits. Although gap loan has helped countless real estate investors carry out deals they may not have otherwise had the chance to, it must be used conservatively.
Benefits of Commercial Gap Funding
Gap loan serves a very specific purpose. This is suitable for investors flipping a high volume of commercial properties. With that said, other benefits attract most investors.
Free Up Your Cash
Through a gap loan, you can increase the number or size of your deals, since you avoid cash limitation you’d otherwise face. This down payment gap funding can create an overall increment in your revenues and profit, enabling you to grow your business faster. For large deals, you can make a good profit even after sharing it with the gap lender.
Simplifying the Primary Loan
What if your primary loan is from a hard money lender willing to fund up to 60% LTV of your rehab project? Second position gap funding doesn’t harm your hard money lender as the lender will maintain its primary lien position. Besides, you can wrap bridge loan interest charges into the gap lending. Plus, the hard money financier has a positive incentive to make the primary loan.
Reducing Cash Outflow
A great feature of the gap financing is that you can cover the interest payments from the primary loan into the gap funding. For example, suppose you take 1 year, interest-only construction loan with an expanded payment at the end of the term. It might allow you to get a low-interest rate on the primary loan. And, it can release you of your immediate debt service obligation on the primary funding.
When Should You Use Gap Fund?
Second position gap funding makes sense if:
- Your real estate project is high-end and will produce a sizable profit.
- You don’t have enough cash to close the deal, or you simply want to conserve your cash.
- You are seeking to maximize your cash on cash yield.
- You need a gap loan to remain liquid.
- You need extra money to complete the job.
- You want to avoid out-of-pocket interest payments on the first lending by wrapping them into the gap loan.
How to Get a Gap Loan?
Receiving a gap lending will require investors to decide whether they want to check traditional or alternative forms of funding. Those who select a traditional bank for borrowing will need to apply a lot like a regular loan. Those who work with private or hard money lenders will need to entice interested investors. As down payment gap funding is technically riskier, investors will need to convince the gap lenders that their investment would be worthwhile. As a hard money loan, the capital received from gap lenders is most asset-based than anything else. Additionally, you can contact Hard Money Loans for quick gap financing.
Get in Touch with Hard Money Loans!
If you are looking for a quick gap loan without any hassles, turn to Hard Money Loans for professional expertise. We have a proven track record of meeting our client’s gap funding needs. Our goal is to provide our clients with a low transactional risk commercial gap funding structure alongside a seamless, focused experience.
For more information about getting and funding a gap funding for your large commercial real estate project, you can contact us today at +1 (310) 666-8884.