What Is Asset Based Lending for Real Estate?

Asset based lending for real estate has been a prominent financing option in recent years due to its adaptive and successful technique of funding real estate investments. Making wise choices regarding obtaining funding for your next project can be made easier by having a solid understanding of the foundations of asset based lending.  

Are you a prospective or present real estate investor looking to increase your income? If so, asset based lending might be a good choice.  

What Is Asset-Based Lending for Real Estate?

A loan secured by an asset is referred to as asset based lending. To put it another way, in asset based lending, the lender secures the loan by holding an asset or assets belonging to the borrower as collateral. 

In asset based lending, the borrower’s assets serve as collateral for the loan. Marketable securities, inventories, accounts receivable, property, plant, and equipment (PP&E) are a few examples of assets that can be used to finance a loan. 

Asset based lending is less risky than unsecured lending (a loan not backed by an asset or assets) since the loan is secured by an asset, resulting in a lower interest rate. Additionally, the less risky the loan is and the lower the interest rate required, the more liquid the asset is. 

For instance, an asset based loan secured by accounts receivable would be safer than an asset based loan secured by a property because the latter is less liquid and may be more challenging for the creditor to sell on the market speedily. 

How Do Asset Based Loans Work? 

Nearly all real estate assets used as collateral for loans are the foundation of real estate asset based lending. The lender will conduct a cash flow study to ascertain whether the property is viable as an asset after collecting all relevant financial information about it. 

It will consider the anticipated rental income and costs like maintenance, insurance, and property taxes to calculate the net cash flow. The analysis calculates the loan amount, which may be up to 70% loan-to-value (LTV).  

The typical asset based loan duration is one to five years, giving you adequate time to prepare the property for sale or make arrangements for a conventional refinance. 

How Does Asset-Based Lending for Real Estate Differ From Traditional Real Estate Lending? 

Despite producing substantial assets, a business may still need more cash. It might expand so quickly that the investor’s cash flow doesn’t match the standards for conventional financing. There is a way for investors to make their assets work even harder in these circumstances and deliver a helpful liquidity boost. 

Asset based lending may be the best option for investors wanting to finance their working capital requirements, smooth out seasonal cash flow volatility, pursue expansion prospects, or finance increased leverage or debt situations. 

Asset based lending is a dynamic approach for securing money for a property’s ongoing needs and potential for future expansion. It might offer more beneficial financing than conventional loans, probably with quicker processing periods and more affordable rates and conditions. 

What Are the Benefits of Using Asset Based Lending for Real Estate? 

Asset based real estate lending benefits investors of all sizes and types, especially those who want to spread their cash flows across several properties and increase loan proceeds. The amount of real estate an investor can purchase is primarily determined by the cash flows from the property. Beyond that, investors have access to the following benefits: 

Faster Processing, Closing, and Turnaround 

When employing asset based financing, loans often close much faster than a conventional mortgage from a bank or credit union. This results from less strict underwriting standards, which enable the underwriter to analyze the file more quickly and provide a final lending decision. 

Private lenders also enjoy greater freedom and are not subject to the same limitations as conventional lenders offering conventional and government-backed loans. 

Little Down Payment Required 

With an asset based loan, you can qualify with as little as a 20% down payment. Although some lenders could be ready to lend the entire property’s value, you’ll probably receive less favorable terms, such as a higher interest rate. 

Less Documentation and Paperwork 

You can avoid the piles of paperwork and financial records you would otherwise require if applying for a conventional mortgage package.

Not Reliant on Personal or Business Assets 

As previously stated, asset-based loans are based on collateral and your business’s investment plan to increase revenue. This implies that the size of your personal or business assets isn’t always a deal-breaker. 

How Does Asset-Based Lending for Real Estate Help to Finance Real Estate Projects? 

Real estate projects can be financed through asset based lending by using the property bought or developed as collateral. Instead of relying on their personal credit histories or income, this financing enables developers and investors to receive funds based on the worth of the property.  

It presents a compelling alternative for those who might not be eligible for conventional bank funding. The property serves as security for the loan, and in the event of default, the lender may foreclose on the property to recoup the loan balance. 

How Can Asset Based Lending for Real Estate Support Cash Flow for Real Estate Investors? 

In general, assets based lending for real estate gives real estate investors access to a flexible, quick, and dependable source of funding that can support their cash flow and assist them in expanding their businesses. The following are some ways that asset based lending for real estate might support real estate investors with their cash flow: 

No Limitations on the Use of Funds 

In contrast to conventional loans, asset based lending allows investors to put their money to whatever use they see fit. 

Generates Extra Funds 

Real estate investors can use asset based lending to leverage their current properties and earn more money. This may facilitate better cash flow and offer a reliable source of revenue. 

Access to Quick and Flexible Financing 

Asset based lending gives real estate investors immediate access to funding, allowing them to capitalize on fresh possibilities and successfully manage cash flow. 

What Types of Properties Are Eligible for Asset Based Lending for Real Estate? 

Property types that are frequently included in asset based lending for real estate include: 

• Multi-family residential buildings 
• Office buildings 
• Retail centers 
• Industrial properties 
• Hospitality properties (hotels and resorts) 
• Self-storage facilities 
• Senior living facilities 

Some typical property types may be eligible for asset based lending for real estate, though eligibility might vary based on the lender and their underwriting requirements. 

What Are the Qualifications for Obtaining Asset Based Lending for Real Estate? 

The incredible thing is that asset based lenders rarely want a thorough application with reams of an investor’s personal financial information. However, it necessitates in-depth documentation of the asset and the investor’s management strategies.  

The lender will take the investment goal, the expected return on investment, the property valuation both as-is and after repairs, and the investor’s exit strategy into account when determining the loan amount and interest rate. 

The more thorough the investor’s documentation and financials are, the more probable the lender will share that perspective, but that is only sometimes the case. The asset based real estate loan application and approval process are much quicker and more straightforward than conventional real estate financing. 

A loan can generally be granted and funded for an investor within one to two weeks. Investors will need to come up with a 5% down payment for most asset based lenders. 

Although eligibility requirements differ by lender, the following should be considered before applying: 

• The lender will ask for a lot of paperwork outlining your strategy for running the property profitably and efficiently. 
• Your investment goal expected profits, and exit strategy significantly impact the loan amount and conditions you’re authorized for. 
• As was previously said, while determining whether you qualify for a loan, the lender focuses more on property values than credit history. As a result, your efforts to raise your credit score will be ineffective when you apply for asset based financing. 
• an assessment of the property to establish its market value 
• Proof of property maintenance and insurance 
• Proof of the property’s ownership and any debts or liabilities on it 

Conclusion  

For those wishing to use their real estate assets as collateral for rapid and flexible finance, asset based lending for real estate can be a helpful financing alternative. This approach offers borrowers a more simplified and effective process and a more adaptable repayment plan. It’s essential to carefully weigh all your options before deciding on a loan, just as with any other financial decision. 

Finance Lobby is the top real estate financing marketplace in the US. Our goal is to equip the rest of the CRE lending community with the tools necessary to overcome the inefficiencies and inequalities in the current processes used in this industry. 

Finance Lobby has demonstrated its ability to democratize professionals’ access to possibilities nationally and to restore ease and joy to the loan process. Sign up for an account on Finance Lobby to get access to the nation’s largest commercial real estate broker-lender marketplace.