Real Estate Gap Funding: A Humanized Guide

Real estate gap funding, also known as a bridge loan, is a short-term loan that can help you cover the costs of a real estate deal until you can secure long-term financing. This can be a lifesaver if you’re working on a tight timeline or if you need to close a deal quickly.

Let’s say you’re a real estate investor who’s looking to buy a property for $100,000. You have $20,000 in cash on hand, but you need to borrow the remaining $80,000. You could get a traditional loan from a bank, but the process of getting approved for a loan can take several weeks. In the meantime, the seller of the property may be getting impatient and may be willing to sell the property to someone else.

This is where gap funding comes in. A gap lender can provide you with a loan for the remaining $80,000, so you can close the deal quickly. The gap lender will typically charge you a higher interest rate than a traditional lender, but it’s worth it if you need to close the deal quickly.

How does gap funding work?

Gap funding works by providing you with a loan that covers the “gap” between the purchase price of the property and the amount you can borrow from a traditional lender. For example, let’s say you want to buy a property for $100,000, but you can only get a traditional loan for $80,000. A gap lender could provide you with a loan for the remaining $20,000.

The gap lender will typically lend you the money for a short period of time, such as 6 months to 1 year. During that time, you’ll need to find a long-term lender to provide you with permanent financing. Once you have permanent financing in place, you can repay the gap lender.

Who is it for?

Gap funding is a good option for investors who are working on multiple deals at the same time or who need to close a deal quickly. It’s also a good option for investors who don’t have enough cash on hand to cover the down payment and closing costs.

What are the risks?

Gap funding comes with some risks, including:

Higher interest rates: Gap loans typically have higher interest rates than traditional loans.

Prepayment penalties: Some gap lenders charge prepayment penalties if you pay off the loan early.

Risk of default: If you default on the gap loan, you could lose the property.

How do I get a gap loan?

To get a gap loan, you’ll need to find a lender who specializes in this type of financing. You can search online or ask your real estate agent for recommendations.

When you’re applying for a gap loan, you’ll need to provide the lender with information about the property you’re buying, your financial situation, and your exit strategy. The lender will also need to assess the risk of the deal.

When should I use gap funding?

Gap funding is a valuable tool, but it’s not right for every situation. You should only use it if you’re confident that you can repay the loan and make a profit on the deal.

Here are some tips for using gap funding wisely:

Only use it for high-value deals with significant potential returns.

Make sure you have a clear exit strategy.

Be prepared to pay higher interest rates and fees.

Real estate gap funding can be a valuable tool for investors who are looking to close deals quickly and maintain liquidity. However, it’s important to use it wisely and to be aware of the risks involved.