A typical hard money loan only covers 70% to 80% of the purchase price of a property. That leaves the real estate investor to come up with the other 20% to 30% as a down payment, plus closing costs. And while most hard money lenders do provide 100% of the renovation costs, lenders require the investor to put up the money for each phase of repairs first; only then will the investor be reimbursed in draws.

In other words, investing in real estate needs tens of thousands of the investor’s personal own money to flip a house or do a BRRR deal—unless they borrow from a second source for real estate gap funding.

Theoretically, one can use gap funding to flip a house with no money down. But its uses go beyond trying to invest with nothing but other people’s money.

Sometimes investors run over budget on the renovations of a flip and need a quick influx of cash. Alternatively, a renovation project may take longer than expected, pinching them on carrying costs and risking foreclosure.

In other cases, investors have most of their money tied up in another rehab, but find an outstanding deal too good to pass up.

There are many potential sources of gap funding for real estate investors.

While not an exhaustive list, anyone investing in real estate may consider these options for real estate gap funding.

Gap Lenders

Some lenders specialize in gap funding for real estate investors. Because they take a second lien position behind the hard money loan, and because they are lending a high loan-to-value ratio (LTV), they take on enormous risk. Which means they charge accordingly, with high interest rates and fees. Some gap funding lenders also require a percentage of the profits from the deal to make the loan worth their while.

For an example of a gap lender, check out Gap Funding Solutions.

Personal Loans

Alternatively, investors can borrow an unsecured personal loan from a bank or other lender. Some hard money lenders even offer unsecured personal loans (check out New Silver as an example).

That said, personal loans are not cheap. Without a lien securing them to real property, they come with significant risk for the lender.

Private Notes

Some real estate investors raise money privately from friends, family members, colleagues, and acquaintances.

On the plus side, private money is flexible and the terms are negotiable. However, it risks personal relationships (for both the lender and the borrower) and it takes time and a proven track record to build the trust needed to borrow money privately from friends and family.

HELOCs

Investors can open a home equity line of credit (HELOC) secured against the equity built up in their home or rental property.

These credit lines work similarly to credit cards, like a revolving line of credit. Borrowers can draw on it as needed and pay back the balance on their own schedule. That means  HELOCs can be flexible funding sources for down payments, closing costs, and repair costs for real estate deals.

Note that HELOCs tend to come with medium interest rates—higher than mortgages but lower than gap loans or personal loans. But because they attach a lien against the borrower’s property, they often have to go through a title company and a formal settlement, which means thousands of dollars in closing costs.

Business Credit Lines

Not all lines of credit require a lien against the borrower’s property. Investors can also open unsecured business credit lines.

However. high interest rates are expected, though these are offset with fewer fees since borrowers do not need to do a title search or traditional closing. However, borrowers with no inventory or collateral may not get approved for a particularly high credit limit.

Credit Cards

I once bought a property with credit card balances alone. As you can guess, it was a lower-end property.

Investors are not limited to personal cards, however. Like with business credit lines, they may qualify for business credit cards due to their status as a real estate investor. These credit cards also eliminate hefty cash advance fees; investors can simply use services like Plastiq to pay for real estate costs with their credit cards. Most of its fees are less than a personal credit card’s cash advance fee (and without the cash-out limit).

Fund & Grow is a business credit concierge service that helps investors open the maximum allowed credit lines and credit card balances.

Joint Venture Partners

Finally, any investor can partner with someone else and have them bring cash to the deal.

Investors without cash can perhaps supply the expertise, the legwork, or some other crucial piece of the puzzle. The partner, meanwhile, supplies the lion’s share of the down payment and closing costs, while the investor negotiates a profit-sharing agreement.

As the old investment cliche goes, 50% of something is better than 100% of nothing.

In a perfect world, anyone can come up with cash to cover the down payment, closing costs, and first draw of repair costs for each real estate deal.

But real estate investing gets messy sometimes, and borrowers may often find themselves in a cash crunch. That said, it is important to know when to double down with creative financing and when to say no to promising deals if they will stretch the deal too thin.

At the end of the day, gap funding is a form of leverage. Use leverage in real estate carefully. The more leverage one uses in a real estate deal, the higher the risk. In some cases, however, leverage can help the investor earn more money by salvaging a deal they would otherwise miss out on.

• Gap funding is a way to bridge the gap between the loan from a lender, typically a hard money loan, and the cost of the real estate project or investment.
• There are various sources for gap funding, including specialized lenders like gap lenders. However, borrowers can tap into common sources of financing, including HELOCs, private money, and even a silent partner.
• As a form of leverage, gap funding offers access to deals that the investor would have to pass up on otherwise, but it still requires careful analysis of the deal to avoid getting burnt.