What is gap funding in real estate?

What is Gap Funding in Real Estate?

Gap funding in real estate, also known as a bridge loan, is a type of financing used to cover the financial "gap" between the funds available to a real estate investor and the total cost of a project. This can include costs associated with acquisition, renovation, marketing, and selling a property. Gap funding is typically sought after hard money loans, which may only cover a portion of the project's total cost, usually around 70% of the property's value. Investors turn to gap funding when they need additional financing to complete a project but wish to avoid using their personal funds.

This form of financing is valuable for real estate investors who are involved in house flipping or have multiple projects and need to maintain liquidity. However, gap loans often come with higher interest rates than traditional financing due to the increased risk to the lender, who usually holds a second lien position on the property. This means if a project fails, the gap lender is at a higher risk of not being repaid.

Despite the higher costs, gap funding can be an essential tool for investors, enabling them to leverage more opportunities without tying up their capital. It's particularly useful for covering unexpected expenses or when an investor needs quick funding to secure a property. Yet, it's crucial for investors to weigh the benefits against the costs, as the higher interest rates and potential for profit sharing with the lender could affect the overall profitability of a project.