How Gap Property Investment Works
Gap investing is a strategy where you purchase a property using the tenant's advance deposit to offset the purchase price. Your actual cash outlay — the "gap" — is the purchase price minus the tenant deposit, plus acquisition costs. The smaller the gap, the higher your leverage and potential ROI on price appreciation.
Example Calculation
| Item | Amount |
|---|---|
| Purchase Price | $500,000 |
| Tenant Deposit | $350,000 |
| Closing Costs | $15,000 |
| Net Cash Investment | $165,000 |
| ROI on $50K gain | 30.3% |
The higher the deposit-to-price ratio, the greater the leverage effect. However, a very high ratio also increases risk: if the property value falls below the deposit amount, the investor may struggle to return the deposit when the tenant leaves. Always evaluate cash flow and market conditions carefully before committing.
Frequently Asked Questions
In the US, tenant security deposits are regulated by state law and must typically be held in a separate escrow account and returned at lease end. Large advance deposits may have different legal requirements — consult a local attorney.
Jeonse is a Korean rental system where tenants pay a large lump-sum deposit (usually 50–80% of property value) instead of monthly rent. At lease end, the full deposit is returned. This makes gap investing very common in Korea's real estate market.