Real Estate Investing and Asset Based Lending

Real estate financing comes in many forms. Anyone interested in real estate investing has probably heard of asset-based lending. It is an efficient financing option where collateral in the form of an asset secures the loan. With real estate investors, the said asset is usually the investment property.

Asset-based lenders enable real estate investors to get funds in a way that doesn’t require opting for a traditional loan. Although not suitable for every real-estate project, an asset-based loan comes with significant benefits, especially for investors involved in house flipping.

However, before applying, you should first learn what it is and how you can benefit from it. Making the right financing choice is critical for the success of every investor’s business, so make sure your choice fits your needs entirely. At the same time it is also important to find the right real estate investor lead. Once you discover a lender who offers reasonable terms, you’re free to build a long-term relationship with them and probably benefit from that relationship, too, especially in the long run.

Since they offer asset-based loans, private lenders have more flexibility in loan options compared to traditional lenders. They will help you by tailoring a loan that fits your specific needs to give your investment a bit of a boost.

But first, let’s start with the basics.

What Is Asset-Based Lending?

Loaning money in a legal agreement secured by specific collateral is called asset-based lending. The terms of asset-based loans depend on several factors, including the collateral value and type. Essentially, an investor puts his future revenue on the line to get quick access to cash in the present. Private lenders provide these kinds of loans, and their requirements differ from those of traditional banks.

Lenders created asset-based lending specifically for business purposes rather than for individuals borrowing money to buy their first home. Investors use them for fix and flips (they purchase a rundown property, renovate it, and then sell it for profit.) They typically run a real-estate business, and securing an asset-based loan is easy with a detailed record of your business. For the lender to approve a loan, they need to prove your investment has long-term viability, and that you are ready to take on a project of that size.

Down Payments and Interest Rates

Lenders consider asset-based loans to be riskier than other financing options which is why they often require down-payment from the borrower. Usually, you need to put down up to 20% of the estate’s value to secure the full loan amount. This method gives both the lender and borrower a stake in the entire project and motivates the borrower to put in extra effort to make it succeed. However, a down payment is not a blanket rule. Depending on the project and private lender, you may get funds for up to 100% of the property value.

Interest rates vary depending on the type of project, asset value and location, and from one lender to another. If you opt for a loan in a more expensive area, you’ll get higher rates than in a more affordable state or county.

Common Types of Asset-Based Loans

There are two common forms of asset-based loans: private loans and hard money loans. Although many people think these are two terms for the same kind of loan, there are specific differences between the two you need to understand.

What Is a Hard Money Loan?

Hard money loans usually come with strict guidelines because lenders primarily offer them to investors. The borrower needs to follow the guidelines and provide everything the lender asks for, from project plans and draws to repayment strategies (with short repayment terms) and contractor payment plans.

What Is a Private Money Loan?

Unlike hard money loans, private money loans are aimed at individuals and can be significantly more flexible. However, to use a private money loan for a real estate business, you need to develop a strong network to know who to ask and how to ask. Building beneficial working relationships with private lenders can take months, sometimes even years for investors. However, you must invest time and energy in those relationships because they are the key to going back to more projects in the future.

Why Use Asset Based Lending?

Real estate investors use asset-based lending because it bases the loans on the investment or project, rather than the borrower’s cash or income position and credit history. Unlike many other financing options, private money lenders only look for safety in the property’s value and your investment plan. If you have a strong strategy with an excellent after-repair value and put down valuable property as collateral, you will likely land an asset-based loan without much trouble.

These loan types enable investors to get funds quickly, and the lender gives them enough time to upgrade the property and profit from either selling it or using it as rental space.

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