Updated onJuly 10, 2022

Asset Based Lending For Real Estate

7 Min Read

Difficulty:moderate

Written by:**Sarah Sharkey**
Personal Finance Writer

All content presented here and elsewhere is solely intended for informational purposes only. The reader is required to seek professional counsel before beginning any legal or financial endeavor.

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.

Key Points:
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.

Asset-Based Lending

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.

What is an asset-based lender?

An asset-based lender for real estate is sometimes called a hard money lender. As a borrower, you will provide real estate as collateral for this type of loan.

What are the typical use cases of asset-based lending?

Asset-based lending is regularly used by small to medium-sized businesses that need an influx of cash to handle cover their expenses. Although a business may be rich in assets, tapping into that value can help alleviate cash flow issues. Generally, businesses that pursue this option have significant assets to put up as collateral.

When do commercial real estate investors turn towards asset-based lending?

Commercial real estate investors often turn to asset-based lending in the following scenarios:

● Poor credit: If an investor has assets but poor credit, this type of financing is a good option.

● Flexible financing solutions: Not all loans are created equally. If you have unique funding needs, asset-based lending could work.

● Speed required: Asset-based lending is faster than traditional lending options. With that, investors that need a fast turnaround typically seek out this opportunity.

What makes good collateral in asset-based lending?

Not all collateral is treated equally in the eyes of a lender.

● Equity: Equity is determined by subtracting all outstanding debts secured against a property from its value. So, if a property is worth $100,000 and there is a $60,000 mortgage, the owner would hold $40,000 in equity.

● Positive equity preferred: Most lenders are only willing to offer loans based on collateral in which an owner has positive equity. With that, you’d need to own more than half of the equity in a property.

What types of real estate collateral are problematic for asset-based lending?

If you are pursuing asset-based lending, here are some problems you might run into.

● Little equity: If you don’t hold a sizeable chunk of equity in a property, then you will struggle to obtain this type of loan.

● First lien position preferred: If you already have an existing loan on a property, that could be an issue. Lenders want to be first in line for repayment if the collateral is sold.

How to evaluate the value of my collateral from the asset-based lending perspective?

When evaluating collateral, asset-based lenders want you to have the most possible equity in a property. Essentially, the most equity you have, the better your approval chances are.

Would an asset-based lender be more motivated to take my property than a regular mortgage company?

Asset-based loans for real estate are technically business loans. With that, you won’t find the same foreclosure protections in places as you would for a consumer mortgage. However, that doesn’t mean that lenders aren’t willing to work with you. If you are struggling to keep up with a loan, reach out to your lender to explore possible solutions.

Conclusion

Asset-based lending for real estate is relatively straightforward. You’ll use a piece of real estate to secure a loan. Before you jump into any business loan, explore all of your options to find the best fit.