← Back to BlogMay 20268 minDan White
Gap Funding in Real Estate: What It Is and How to Use It
Hard money lenders typically fund 65–75% of ARV. If your purchase price plus rehab exceeds that ceiling, you have a gap. Gap funding covers that shortfall using a second loan or equity partner. Here's how it works.
Market Context
Live Market Data
Washington, DC Housing Market
Cool Market
Data through Mar 2026
Median Sale Price
$590,000
+0.8% YoY
Median Days on Market
44 days
lower = faster market
Sale-to-List Ratio
99.7%
buyers' market
Homes Sold
4,457
last reported month
Source: Redfin Data Center. Updated monthly. Data reflects Washington, DC residential sales.
redfin.comWhen Gap Funding Is Needed
Example: ARV = $350,000. Hard money lends 70% = $245,000. Your total project cost (purchase + rehab) = $265,000. Gap = $20,000. You need gap funding to cover the $20,000 the hard money doesn't provide.
Gap Funding Sources
- Private lender second position: A private lender takes a second lien position behind the hard money first. Higher rate (12–18%) because of subordinate position. Often called a "mezzanine" loan.
- Equity partner: Partner contributes gap capital in exchange for a profit share. No interest — profit split instead.
- Your own capital: Simplest option if you have reserves. No interest, no partner, full profit.
- Seller financing for the gap: Seller carries a small second mortgage for the gap amount. Requires seller cooperation.
Model Your Full Capital Stack Free
Freddie calculates returns at any financing structure — first position, gap funding, equity partner. See your real ROI before committing. Free.
Model My Capital Stack Free →Gap Funding Economics
Gap funding at 15% on $20,000 for 8 months = $2,000. If the deal produces $50,000 profit, that $2,000 cost is worth paying to close a deal you couldn't otherwise fund. If the deal produces $25,000 profit, think more carefully about whether the return justifies the additional complexity and cost.
Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in real estate for 20+ years.