Should I do a gap loan with no money, gap loan with $5k, no gap?

[Mike Schorah]

A local hard money lender with local underwriting can lend up to 75% of the After Repaired Value (ARV). 65% as a primary loan at 11.95% APR and 2.95 points. 10% as a gap loan (if needed) at 19.95% and 4.95 points.

Example:

So, let's use an example of an ARV of 300K, purchase price 165K, and renovation 50K.

I need 165K + 15K settlement costs & points + 50K for reno = 230K

Loans will cover:

Primary loan of 65% of 300K = 195K, so the primary loan will cover the 50K renovation and 145K of the 165K purchase. I still need 20K plus 15K settlement costs & points = 35K for closing.

Instead of additional collateral or cash in to cover the 35K still needed, there is the gap loan of 10% of 300K = 30K to help cover the 35K still needed. So, in this scenario, I would need 5K cash in + 30K gap loan + 195K primary loan.

Points at the end:

To reduce the cash in needed upfront, points can be paid at the payoff instead of a settlement expense at the beginning. The points cost goes from 2.95% of the loan amount to 3.45% to pay them at the end. Instead of 5K cash in and a 30K gap loan, I could push the 7K of points to the end of the loan, which increases the loan proceeds by the same 7K and eliminates the 5K cash in and 2K of the 30K gap loan. So, I would have a primary loan of 195K, a gap loan of 28K, and no cash in.

My intentions are to do a BRRRR and NOT a flip