Gap Funding for a rehab project in Chester County Pennsylvania

[Melissa M.]

Good evening everyone!

I have been a real estate investor since late 2016.  I had started out in wholesaling but then starting into the flipping side of the business.  In 2017 we have completed 9 deals which was a mix of rentals and rehab purchases. 

During this time we were able to use private lending to completed these deals and the total projects were less then 100k in total so finding private funding for these amounts was very easy. 

Our next project is in a neighboring county where the house prices are a bit higher.  So at this time we do not have someone that can lend on 100% of the project.  The lender we do have is offering 85% of the purchase price and 100% of the rehab.  I will be $50,000  short for the project.  I am bringing in a second lender who will be able to cover the extra amount that I do not have at this time. 

I am just learning about "Gap funding" and was hoping someone might have some advice on this.  In order to secure his funds do I put him in second lien position? Or do I do unsecured with just a promissory note?  I assume the answer will come down to what my first lender prefers and what the second lender is most comfortable with.

Just looking for some expert advice. And honestly the private lender that is lending in first lien charges 15% so I am thinking it might make more sense to just JV with someone once we pay out all of our lender fees.

Thank you for you help!

[Doug W.]

Yes @Melissa M.. First, check with the first position lien lender and make sure that they are ok with a second lien holder on the property.

As with any lender/lendee relationship you all can decide on whether the note is secured by the property (or some other collateral) or unsecured. Again, that is up to you and your lenders to determine and decide. 

Typically I offer my gap funding partners a higher interest rate as an incentive for the added risk of taking either a 2nd position or being unsecured. In all situations I do use a promissory note.