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What Is Gap Funding for My Real Estate Investments?

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In the real estate investment world… What is gap funding?

You should never count on a bank or hard money lender to give you a loan that will cover 100% of your real estate investment property.

What you should be able to someday count on, though, is your gap funding.

So, what is gap funding?

Definition: What Is Gap Funding?

Gap funding is the money you bring in from another source to fill any gap left between the lender and the project costs.

If a lender offers you 70% of the LTV on a property, gap funding is how you fill in the remaining 30%. Usually, you secure gap funding, although unsecured gap funding is possible.

A “secured” loan means that the debt is backed by a piece of collateral. In a typical gap funding scenario, the loan is secured by the property being purchased.

For the most part, you won’t be able to find a gap lender at an institution like you can a bank lender. Instead, gap lenders are family members, friends, or someone you know.

OPM vs Gap Funding

You can use a couple gap funding terms interchangeably:

  • gap funding
  • gap lending
  • OPM (other people’s money)
  • real people’s money

All of these terms get at the same concept. It’s money, not from you and not from an institutional lender, that covers whatever costs of an investment property that your lender won’t fund.

OPM can cover up to 100% of a deal, but for now, we’ll be talking about it in a strictly gap funding sense. These are loans that fill in the holes of a project that a mortgage or hard money loan wouldn’t cover.

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What is gap funding

What Is Gap Funding? And How Do You Get It?

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When to use gap funding and how to attract lenders.

A mortgage covers the bulk of the cost of purchasing a new property. But what about all the costs in-between?

There are some big price tags in real estate investment that bank loans won’t usually cover. You’ll still need to find a way to pay for your down payment, the fix-up cost, and any carrying costs for the property.

How do you fill those gaps?

What is Gap Funding?

Gap funding is the money source you use to cover these extra costs in real estate. Private individuals can lend money to fill the gaps in your investment.

All real estate investors at any stage can utilize gap funding. Typically, gap funding is most useful to investors just starting out, who haven’t yet made or saved enough money to fund their own investments entirely.

However, we also see people who are already multimillionaires with years of investing under their belts use gap funding. It’s a great way to leverage investments at any level.

Where Do You Find Gap Funding?

You might find a few banks and other lenders who do gap funding, but the main way to get it is through OPM, Other People’s Money – think of it as Real People’s Money.

These people can be family, friends, or members of a real estate group. These people don’t necessarily have enough to fund your entire flip, but do have $20,000 to $50,000 sitting in an account or IRA. They don’t want to do the actual work and risk of investing, but they do want the potential for a higher return on their money than they’d get from a bank.

How Do You Get Gap Funding?

Getting people to loan you their money may sound easier said than done. After all, OPM is often either secured by second-lien or unsecured, so you wouldn’t put your money in that situation with just anyone.

There are a few key traits you’ll need to show to attract the people who can provide you with gap funding:

  • Respect their money
  • Protect their money
  • Be honest

Having these qualities will be the deciding factor in someone lending to you over another investor.

Respect Your Lender’s Money

Understand what your lender wants and expects out of the deal, and be sure they get it. Make them feel respected and confident with you handling their money.

Protect Their Money

Treat the money professionally – even more carefully than you’d treat your own cash. Be diligent in arranging the proper liens, proper insurance, and proper documents.

Be Honest

Tell your lender everything that happens with your project. They have a right to know what they’re investing in. It’s better to be straightforward and allow your lender to make their own decisions than to keep secrets about the deal until it comes back to bite you.

Grow Your Funding

If you make your lender feel good after the first transaction, they’ll want to come back for another. Good deals can lead to a web of funding. A lender who has a good experience with you will tell their family and friends that you’re a good person to lend to.

Respecting, protecting, and being honest with your OPM helps you grow. Investing is much easier with gap funding covered by OPM, and it’s possible to someday fund entire projects with OPM.

Learn More about Gap Funding and OPM

If you’re interested in growing your real estate investment business, check out the following resources:

Download our free OPM checklist at this link.

Learn more about gap funding and OPM with these videos.