Asset Based Lending for Real Estate | Hard Money Lenders for Real Estate Investors

Asset Based Lending for Real Estate as a Viable Choice to Fund Your Investment

By | 2019-12-13T08:24:42+00:00 December 13th, 2019|Hard Money Blogs|Comments Off on Asset Based Lending for Real Estate as a Viable Choice to Fund Your Investment

When investing in real estate, not everyone can secure lending via traditional methods. This is where asset based lending for real estate can be useful.

For those with their own business, asset based lending is an attractive proposition for many.

However, though an appealing lending alternative, it does need the help of an expert to guide lenders through the process.

Here we look at asset based lending for real estate in further detail. Looking at why some people refer to such a lending choice, alongside how it works, we then consider if it could be the method for you.

What is Asset Based Lending for Real Estate?

An alternative way of obtaining finance asset-based lending uses assets as collateral to obtain financing solutions. Such assets can be the leverage of an individual or a company.

Asset-based lending is a more recent means of financing that has emerged in the real estate industry. Since its arrival, it’s created fantastic new opportunities. This has meant that investors of all sizes have been able to get a slice of the growing rental market.

The Types of Assets Used in Lending

There is a typical list of assets commonly used in asset-based lending. These include:

  • Property
  • Plant and Machinery
  • Equipment
  • Inventory
  • Debtors

Some hard money lenders will accept commercial real estate as collateral. However, for many, there is a strong preference for swift and easy liquidated collateral. An ideal example of this is in the form of securities.

This typical list of items showcases collateral that will provide a lender with security. Thus, should the borrower default in their loan, the provider knows they’ll be repaid in the event.

How the Industry Considers Asset-Based Loans

For both borrowers and lenders, such asset-based loans will often be referred to as hard money loans. Unfortunately for many, this will mean they attract those higher than average interest rates.

Also, some of these loan types will be structured as term loans. Others are structured in the form of revolving lines of credit.

Why Do Individuals and Businesses Utilize Asset-Based Lending?

asset based lending for real estate

There are two primary reasons why individuals and businesses turn to asset-based lending.

The first most common reason is an inability to meet criteria demanded by traditional lending.

The second reason is that many businesses realize they have a vast amount of capital tied up in their company. So, it makes more sense to access this financial avenue, rather than lending money from traditional institutes, such as banks, for example.

Those smaller and mid-sized businesses are often more commonly drawn to asset-based lending. For many, this is simply because they find themselves rich in assets – but less fortunate with their cash and credit status. 

This means that the possibility of getting a loan via a traditional method is not open to them. Likewise, the lengthy process of applying for such loan types would not suit them either.

Qualifying for Real Estate Asset-Based Loans

Varying somewhat from a traditional loan process, asset-based loans tend to require a less in-depth application process.

However, though it’s not the same, the more detailed information given in financials and documentation provided, the more evidence a lender has for consideration.

Lenders will require documentation of the property in question and the plans from the investor regarding the management of it. This will then form the basis of the loan amount to be offered as well as the interest rate.

Equally as important information-wise here is that of:

  • Investment objective
  • Investment anticipated return
  • Current repair value of property
  • After repair value of property
  • Investor exit strategy

How Does Asset-Based Lending Work for Real Estate Purposes?

The process for asset-based lending will generally follow a specific procedure. Though this will vary with each lender, businesses and individuals can expect the basic system to follow as:

1. A cash flow analysis is performed

This is based upon the financial documentation provided to the lender regarding the property in question. This analysis determines the viability of the property as an asset. Items factored in here include the projected rental income. This is then set against the expenses required. These include insurance, property taxes, and potential maintenance estimates. The lender will then use all this information to arrive at the net cash flow.

2. The result of the cash flow analysis determines the loan amount

With the net cash flow figure determined; the lender is now in a position to offer a loan. The amount here will vary greatly from lender to lender. Yet the term of the loan usually ranges from one to five years. This allows the borrower time to prepare the property. This is time enough for resale purposes or in the instance of arranging a more traditional means of refinancing.

The Advantages of Accessing Asset Based Lending for Real Estate

Investors are afforded several advantages when accessing asset-based lending for real estate means. Just a few of these include:

  • The ability to leverage cash flow across several properties
  • The ability to maximize loan proceeds
  • Access to an asset-based loan, rather than a credit-based loan
  • A quick turnaround
  • Access to a fast-moving marketplace
  • Initial low down payments
  • Finance isn’t dependent on personal assets or business assets

Asset-Based Lending Increases the Scope for All Types of Real Estate Investors

Ultimately, asset-based lending is vast, becoming a viable means for many people to finance their real-estate plans.

It’s an ideal solution for those investors who’ve had their request turned down in the past by traditional lenders.

Though many people look to get into real estate, not all have the necessary background required for traditional means. Many people have insufficient personal incomes to meet such standards here. As too do those people carrying a large amount of mortgage debt. Therefore, asset-based lending looks beyond that and gives an additional route.

Whether you want to supplement your income through rental properties or build on your current portfolio – asset-based lending is certainly worth investigating further.

Final Tips on Successfully Gaining Asset-Based Loans

Finally, show how your desired property has the potential to generate good cash flow. This will demonstrate how you’ll cover the mortgage payments and required expenses to the lender.

By preparing your documentation in as much detail as possible, you present your case more effectively. With such information to hand, your application for asset-based lending for real estate then stands its best chance.

About the Author:

Yanni Raz is The Founder and CEO of HML Investments, with over 15 years in the real estate and hard money lending industry, Yanni is an expert in real estate investing, trust deed investments and more.