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Asset-based lending for real estate allows you to use real estate or any item of value you own as collateral for a loan to buy a property (or any other type of loan) instead of your salary or employment history.
- This type of loan is a good fit for businesses in need of a cash influx with real estate assets.
- Asset-based lending is based almost exclusively on the real estate’s value. With that, it’s usually faster than other loan processes.
You won’t receive a loan for the entire value of your asset. When real estate is used as collateral, most lenders will provide up to 80% of that value.
If the borrower defaults on the loan, a lender can sell the collateral asset to recoup their losses.
How Does Asset-Based Lending Work?
In asset-based lending for real estate, hard money lenders will use the value of your existing property as collateral for loans (there are various types of collateral for loans) to help you fund more real estate projects.
Loan amounts vary based on the asset: Lenders will not provide a loan for the sum of your available collateral. Instead, the lender will determine a loan-to-value ratio based on the type of collateral assets.
Loan-to-value ratio: The loan-to-value (LTV) ratio is an important component of asset-based lending. In asset-based lending for real estate, an 80% LTV is common.
Liquidity: Real estate is not a liquid asset. The terms and conditions will vary based on the particular property and your business's financial standing.
Example: A loan with an 80% LTV would allow you to borrow up to $80,000 on a property worth $100,000.
6 Advantages Of Asset-Based Lending
Every loan option has advantages. Here’s what stands out about asset-based lending.
Speed: These loans are usually faster than a traditional loans.
Cash influx: If you have your funds tied up in an illiquid asset, like real estate, asset-based lending offers the chance to tap into the value of the asset. This can help you bridge the gap between incoming cash and expenses.
Flexibility for use of funds: You won’t be required to use the funds for a particular purchase. Instead, you can use the funds however you see fit.
Assets speak for themselves: Even as a business owner with a low credit score or limited experience, lenders will still be willing to offer this type of loan.
Limited cash flow is okay: If you have sizeable real estate assets but need cash for your next deal, this opportunity can help you secure more funds.
Flexible repayment terms: Asset-based lending in real estate can come from private lenders. With that, there are no rules in place for how a deal must be structured. You can negotiate with the lender for a solution that fits your funding needs.
4 Disadvantages Of Asset-Based Lending
As with all loans, there are some drawbacks to asset-based lending. Here’s what to keep in mind.
Cost: You may encounter more fees when pursuing this type of financing option.
Higher interest rates: Asset-based loans can be more expensive with higher interest rates than traditional lending options.
Risk of losing the asset: When you use an asset as collateral, it’s at risk. If you default on the loan, the lender can claim the asset and sell it.
Extra homework on your asset: Some lenders require additional details about your asset that may take some time to dig up.
Qualifying for a Real Estate Asset-Based Loan
Qualifying for a real estate asset-based loan is different than most loan processes.
Details about the property: The lender will be most interested in finding out information about the property. Although they will glance at your personal financials, the lender is most concerned about the value and condition of the asset you are putting up as collateral. To discover more see how much collateral is needed for a business loan.
Loan amount and interest rate determination: The lender will consider your goal for the loan funds, the value of the property in question, and your plans for the property (for example, Airbnb rental or other commercial use). With all of this information, the lender will determine what they are willing to lend and what interest rate they will offer. Typically, a higher risk loan will result in a higher interest rate.
Speedy process: Unlike traditional real estate financing that dives deep into your personal finances, this process is more focused on the property. And with that, you should expect a quick conclusion.
Asset-Based Lending Rates
The interest rates of asset-based lending are a critical detail for anyone considering this option.
● Factors that impact interest rates: The lender will consider the loan-to-value ratio, property type, location, strength of the borrower, and more to determine an interest rate.
● What to expect: You’ll likely find interest rates in the range of 8% to 11%.
Frequently Asked Questions (FAQs)
Here’s more information about asset-based loans for real estate.