Gap funding (also known as bridge loans in this context) is a short-term loan that bridges the shortfall between what your primary lender is willing to provide (such as hard money or private financing) and the actual cost of your project.

Hard money lenders typically cover around 65–75% of ARV or cost, leaving a financial gap you must fill.

Gap funding steps in to cover:

• Down payment or closing cost shortfalls

• Rehab or renovation overruns

• Carrying costs or unplanned expenses during the flip
  
  
  

Gap lenders usually take a second-lien position, meaning they’re paid after the primary lender in case of default, so they carry extra risk and charge accordingly.

Why Smart Flippers Use Gap Funding

Gap funding isn’t for every deal, but in the right context, it’s a game-changer.

Use cases include:

• Deals where hard money doesn’t cover the full cost

• Running multiple flips with capital tied up elsewhere

• Projects stretched by delays or unexpected costs

• Avoiding the liquidation of other flips just to free up cash

• Hedging against late appraisals or extensions in lending requirements

By bridging the gap, you maintain momentum, protect equity, and avoid missing great opportunities while capital is tied up.

When Gap Funding Makes Sense (and When It Doesn’t)

When to use it:

• High-margin flips where continuity matters

• Keeping funds liquid across multiple deals

• Deals where hard money plus down payment still leave holes

• Projects nearing end-of-quarter deadlines where speed matters

When to skip it:

• On small or marginal flips

• When you can manage rehab within budget

• When the extra cost outweighs the upside potential

• If reliance on profit-sharing to attract gap capital hurts your margin

What Gap Funding Usually Costs

Gap loans are expensive, reflecting high risk and second-lien status.

Typical costs include:

• Interest rates are generally 1% or more above hard money, often starting around 10–15% annually

• Loan points and fees, common with each lender, can equate to 2–5% up front

• Some may require a share of profits, especially when creative or flexible repayment is built into the deal

Because gap lenders stand behind existing liens, they price that risk into both rate and structure.

Getting Gap Funding: Where It Comes From

You can secure gap funding from:

• Private investors or equity partners (often other real estate pros or groups) 

• Hard money lenders that offer mezzanine or second-lien loans

• Institutional lenders, though less common in small flips

To attract a gap lender, you’ll need:

• Strong flip underwriting (ARV comps, scope, timeline)

• Clear exit plan (sale, refinance, or assignment)

• Documentation showing how the gap is temporary and managed

• Trust-based backing or proof-of-success, especially for private sources

Real-World Example: Gap Funding in Action

Scenario:

• ARV = $300K

• Hard money lender approves $210K (70%)

• Rehab + closing = $90K

• Project shortfall = $90K (needs gap coverage)

You invite a gap partner who provides $90K in second-lien capital.

Terms:

• 12% interest for 6 months

• 2 points upfront

• Exit upon sale or refinance

If the flip finishes on time:

• Gap interest = ~$5,400

• Points = $1,800

• Gap total = $7,200

This is steep, but it keeps your flip on track without losing equity.

Risk and Lien Position: Know Where You Stand

Gap lenders sit in second lien position, meaning:

• By default, the first lender gets paid first

• The gap lender only gets paid after the first is satisfied

• Recovering their loan depends on enough equity or completion of the project

That’s why rates are sky-high and terms are shorter than even hard money loans.

Negotiation Playbook: How to Get Gap Funding

Here’s your action flow:

• Build a strong flip deck: ARV comps, budget with contingency, timeline

• Show your hard money loan terms and describe the shortfall

• Offer attractive terms: flat interest, maybe small equity upside

• Be transparent about how quickly you expect to repay

• Use your track record or upside structure to sweeten if needed

Private sources often respond to trust and clarity, not buzzwords.

Managing the Gap Loan Once You Have It

Treat it as a bridge, not a crutch:

• Use it only to fill the real shortfall

• Stick to timelines aggressively

• Track draw schedules so you don’t overspend

• Keep the gap loan separate in your budget

• Exit via sale or refinance within the agreed timeline

The faster the gap closes, the lower the effective interest cost and the higher your net return.

Final Word: Gap Funding Isn’t Cheap, but It’s Strategic

Gap funding isn’t a silver bullet, but when everything’s aligned, it’s a powerful lever.

Used carefully, it:

• Unlocks capped projects

• Maintains cash flow across deals

• Secures speed in competitive markets

But overpriced or poorly planned gap loans crush margin faster than a bad contractor.

So use this tool sparingly, and specifically.