Every television show about buying and flipping properties as an investment strategy seems to focus on ways to make massive profits without spending any of your own money. But that’s almost never the case when you first start rehabbing and selling homes, of course. If you learn how to manage the risks and variables, though, you’ll be able to develop a profitable business in this industry. The first step in succeeding is learning about a host of financial techniques to help you achieve your goals, including one called gap funding. The following are five things you need to know about gap funding…
Gap Funding Is a Second Position Loan
Many professional house flippers have relationships with backers and banks who provide the large chunk of money they need to purchase a property and renovate it so that it’s ready to sell to new, long-term owners(the hard money loan). However, many traditional lenders only offer about 70% of the total amount. Gap funding covers the difference between the hard money loan and the total cost of buying, rehabbing, and selling the property, and might include staging and holding costs that kick in after the renovations are completed and before the property sells.
Gap Funding Is An Expensive Form of Funding
The risks to gap funders are higher than they are to hard money lenders, so the interest rates for this kind of funding are also higher. Gap funders also might request a share of the profits from the sale of the property. This means that it’s best to use this kind of funding conservatively and for a short period of time.
It’s Not for Everyone
Gap funding is a tool that can help high-volume property flippers keep multiple projects moving at the same time, which may lead to higher profits. It’s usually not a good choice for novice flippers with only one or two projects in the works at a time. You might be right in the middle of rehab on one property when another gets delayed in the sales process. In that case, gap funding for the first project offers a solution to a temporary cash flow challenge, allowing you to complete the job you’ve started and then pay back the gap funder as soon as you obtain the money from the sale of the second project.
You Need to Do Some Math
To calculate the gap funding you need as a real estate investor in Cincinnati, be sure you’ve properly evaluated all of the figures you need for purchase, rehab, and sale…
- Purchase price
- Renovation price
- Home value after renovation
- Sale price after renovation
- Hard money loan
- Additional costs (staging, holding, etc.)
Know All of Your Funding Options
Some individuals and small investment groups offer gap funding, particularly for small projects with low costs for purchase and repair, especially if they’re in good real estate markets. Alternative lending marketplaces like Lendio also provide access to lenders through their networks. No matter who you approach to obtain your gap funding, be prepared to offer more information than just the dollars and cents of the project. Be ready with your credit score, business history, and business health, as well as the details of the property and your plans for completing your project.
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