Gap Funding For Real Estate Investors – Pros & Cons

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.