Gap Funding
Short-term capital that covers the 'gap' between what a primary lender funds and the total cash a deal needs — typically the down payment, rehab shortfall, or closing costs on a fix-and-flip.
Gap funding is supplemental short-term capital that fills the shortfall between what your primary loan covers and the total cash a deal requires. Even an aggressive hard money or fix-and-flip loan rarely funds 100% of cost — there's a gap for the down payment, the portion of rehab not advanced, and closing costs. Gap funding covers that gap so an investor can do a deal with little or none of their own money.
The gap, illustrated
Suppose a fix-and-flip lender offers 90% loan-to-cost:
| Item | Amount |
|---|---|
| Total project cost (purchase + rehab) | $250,000 |
| Primary loan (90% LTC) | $225,000 |
| Closing costs | $8,000 |
| Cash gap the investor must cover | $33,000 |
That $33,000 is what gap funding provides. The gap funder is typically repaid — with a fee or a profit share — when the property sells or refinances.
How gap funding is structured
Gap funding is flexible and varies by source:
- Second-position loan. A second lien behind the primary lender, repaid at sale/refinance. Note many senior lenders restrict or prohibit junior liens, so this requires their consent.
- Profit split / JV. A private partner funds the gap in exchange for a share of the flip's profit rather than (or in addition to) interest — effectively a small equity partner.
- Unsecured private loan. A short-term note from a private lender, sometimes secured by a personal guarantee rather than the property.
Why investors use it — and the risk
Gap funding enables low-money-down flipping and lets investors do more deals with limited capital. But it stacks expensive, junior capital on top of an already-leveraged deal:
- It's pricey — gap funders take significant fees or profit shares because their position is risky.
- It thins your margin. With both primary financing and gap capital to repay, a deal that runs over budget or sells slow can wipe out the profit fast.
- It compresses your exit cushion — high total leverage leaves little room for error.
Gap funding is best reserved for deals with a strong margin and a clear, fast exit, where the spread comfortably covers both layers of financing. On thin deals, the cost of the gap can eat the entire profit.
Frequently asked questions
What does gap funding cover on a fix-and-flip?
The cash a deal needs beyond what the primary loan advances — usually the down payment, the rehab portion not financed, and closing costs. Since most fix-and-flip loans cap at 85–90% of cost, gap funding lets an investor cover that remaining slice without using their own capital.
Is gap funding the same as a second mortgage?
It can be structured as one — a second-lien loan behind the primary lender — but not always. Gap funding may also be a profit-split joint venture or an unsecured private loan. The common thread is that it fills the cash gap above the primary loan and is repaid at sale or refinance.
Is gap funding risky?
It increases risk because it stacks expensive, junior capital on an already-leveraged deal, thinning your margin and leaving little room if the project overruns or sells slowly. It's best reserved for deals with a strong spread and a fast, credible exit that comfortably covers both layers of financing.