Gap Funding For Real Estate Investors – Pros & Cons

funding for real estate investors

Gap funding for real estate investors essentially closes the “gap” between what a hard money loan covers and what the actual cost of the investment project is. Also known as bridge loan, a gap funding is an interim loan used to temporarily provide funding for an individual until they can figure out a more permanent solution.

Gap Funding In Real Estate – Advantages And Disadvantages

A gap loan closes the cash gap between what a real estate investor needs to complete their project, and what finances they actually have available. Gap funding lenders can make up for the limitations of most hard money lenders. More importantly, a gap funding has the potential to cover the difference between the original hard money loan and the remaining cost requirements. For an investor, this means the funding can possibly cover the rest of the acquisition costs, along with the expenses incurred during marketing, advertising and selling of the property.

Gap Funding Pros

This type of real estate investing funding is best suited for investors who flip a high-volume of properties. Some advantages of securing a gap funding are:

  • Since this real estate funding covers the gap between hard money loans and the actual acquisition costs, it makes it possible for investors to acquire the properties they otherwise wouldn’t have thought possible.
  • Gap money can be used for more than just acquiring the property; it can be used to cover rehab costs and any other incidental expenses.
  • Unlike traditional bank mortgages that require a lot of paperwork and take months to close, gap funding can be acquired within a matter of days.
  • Gap funding for real estate investors is tailored for those who plan to undertake several property projects at once. In this scenario, a gap funding alleviates the risks you may encounter from a delayed sale or any other unexpected situation that can slow down the rehab process.
  • This funding enables a real estate investor to put down the deposit on a huge investment while they are waiting for a long-term financing to come through.
  • Gap funding gives investors a leeway to remain in a more liquid position.

Gap Funding Cons

  • Since gap funding lenders face an increased risk, they often levy a larger interest rate as compared to banks. Their interest rates are typically 1% higher than traditional mortgages.
  • Gap funding for real estate investors is not ideal for those who want to flip a single deal.
  • Although not a standard practice, some gap funding lenders request a percentage of the proceeds from the sale of your investment properties.
  • Borrowers can also expect to incur additional costs such as appraisal fee, notary fees, loan origination fees, administration fees, title policy fees etc.

When Should You Use Gap Funding?

Which investor doesn’t like quick and easy access to cash?! But it should be noted that real estate gap funding is not required for each and every deal you make. Following are a few scenarios in which gap funding should be used:

  • If you want to maintain more liquidity.
  • You just don’t have sufficient cash on hand to close a deal.
  • You don’t have enough cash reserves to complete an unfinished construction project.  
  • You are eying high-end luxury property projects which will ultimately give sizable returns.
  • The interest payments are piling up due to delays in the closing of a deal.  

In summary, gap funding isn’t without its pros and cons. Although it has helped several investors in achieving their real estate goals, there’s a right and a wrong time to use it. We at BFPM strongly advise you to learn everything there is about gap funding before you take the plunge; you should ideally explore the various other lending options before committing to a gap fund.

Trevor Henson

Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…
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Frequently Asked Questions(FAQs)

Gap funding refers to a form of financing that helps bridge the "gap" between the total cost of a real estate project and the amount of funds initially secured. It is typically used when there is a shortfall between the borrower's available funds and the required amount to complete a project or investment. Gap funding can be obtained from various sources, such as private lenders or investors, and is often considered a short-term solution to cover the immediate financial needs of a project. The terms and conditions of gap funding can vary depending on the specific arrangement between the borrower and the lender.

An example of a funding gap in real estate could be when a property developer secures a loan for the construction of a commercial building but later realizes that the total cost of the project exceeds the amount of the loan. This shortfall between the available loan funds and the actual project cost represents a funding gap. The developer would then need to seek additional financing, such as gap funding, to cover the remaining expenses and successfully complete the construction. The funding gap can arise due to unexpected construction costs, design changes, delays, or other factors that increase the overall project expenses beyond what was initially anticipated.

A gap loan, also known as a bridge loan or interim financing, is a short-term loan used in real estate transactions to bridge the financial gap between the purchase of a new property and the sale of an existing one. It provides temporary funding for the down payment or closing costs on the new property until the sale of the current property is finalized. Gap loans are repaid once the sale is complete and often have a shorter repayment period and higher interest rates compared to traditional mortgage loans.

Yes, gap funding can be used for a down payment in certain real estate scenarios. When there is a shortfall between the funds available for a down payment and the amount required to secure a property, gap funding can be used to bridge that gap. It provides temporary financing to cover the portion of the down payment that is lacking, allowing the buyer to proceed with the purchase. Gap funding is typically obtained from private lenders or investors and is repaid once the property is purchased or through other agreed-upon terms. It's important to note that the availability and terms of gap funding may vary depending on the lender and the specific circumstances of the transaction.