What “the gap” actually is
A hard-money or fix-and-flip loan rarely funds 100% of a deal. It might cover, say, 85–90% of the purchase and most of the rehab — leaving the borrower to bring the down payment, the points, closing costs, and a cushion for overruns out of pocket. That remaining out-of-pocket requirement is the gap. Gap funding is the capital that covers it, usually from a private lender or a gap-funding specialist.
Because it sits behind the primary loan and the primary lender, gap funding is high-risk capital and is priced accordingly — often as a high interest rate, a flat fee, a share of the deal’s profit, or some combination. It is short-term money meant to be repaid when the flip sells or the BRRRR refinances.
Use it carefully — it is the most expensive slice
Gap funding lets you do a deal you couldn’t otherwise afford, and lets you spread limited cash across more deals at once. The flip side is that you are financing nearly the entire deal with borrowed money, which magnifies both returns and risk. If the project runs over budget or the exit slips, the gap lender’s cost compounds the squeeze.
Treat gap funding as a tool for a genuinely strong deal with a healthy margin and a clear, fast exit — not as a way to force a thin deal to pencil. Run the numbers with the cost of the gap capital included before you commit.
Pros and cons
Pros
- Lets you close a deal you’re short the cash to fund
- Spreads limited capital across more simultaneous deals
- Fast and flexible — usually private, lightly underwritten
- Short-term — repaid at sale or refinance
Cons
- The most expensive capital in the stack
- Near-100% leverage magnifies downside risk
- Profit shares or high fees eat into the margin
- Subordinate position makes it hard to find and costly
Frequently asked questions
How is gap funding different from a hard money loan?
A hard money loan is the primary loan that funds most of the purchase and rehab. Gap funding is secondary capital that covers what the hard money loan leaves out — the down payment and costs. Gap funding sits behind the hard money loan in priority and is therefore riskier and more expensive.
What does gap funding cost?
It varies widely because it is private, high-risk capital — often a high interest rate, a flat fee, or a share of the deal’s profit, sometimes a blend. Because it is the priciest money in the deal, only use it on a project whose margin can absorb the cost.