Asset based lending is expanding rapidly across the Globe. Real estate investors are now able to tap into this unlimited supply of funding for their real estate deals with the click of a few buttons! As someone building a real estate portfolio it is very important to understand what asset-based lending is and how to find asset based real estate lenders. Asset-based lending is a broad term that usually describes lending that is specifically used for business purposes.. At it’s very basic, asset-based lending is a loan that is secured by some sort of asset as collateral. Here’s how Wikipedia describes it.
Asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repaid, the asset (Your investment property) is taken as collateral for the unpaid debt. In this sense, a mortgage is an example of an asset-based loan. More commonly however, the phrase is used to describe lending to business and large corporations using assets not normally used in other loans. Typically, these loans are tied to inventory, accounts receivable, machinery and equipment.
So, when something of value is pledged as collateral, it’s an asset based loan. But we’re not talking about a traditional homeowner’s or business loans like Wiki describes it. We’re talking about asset-based lending for REAL ESTATE INVESTING – and it has its own set of rules, purposes, sources and pluses and minuses. The most common types of asset based loans for REI are hard money loans and private money loans.
Hard money is readily available to investors and is typically offered by companies or private investors – and it comes with strict guidelines for everything from project plans to draws for paying contractors to repayment terms (usually very short.)
Private money loans are issued by individuals and can be much more flexible – but you have to know who to ask. It can take months, even years to develop a network of private money lenders to work with. Whether you use hard or private money, building a strong working relationship is the key to being able to go back to more projects.
Real estate investors find asset-based lending attractive because loans are based on the property or project, rather than the personal credit history or cash position of the borrower. Instead, lenders look at the numbers – what’s the exit strategy and anticipated return for the investor, what’s the as-is value of the property and what is the after repair value of the property a fix and flip? They look for safety in the numbers of the deal rather than debt-to-income ratios and credit scores of the borrower.
These loans work great for real estate investors since many are self employed, some have existing mortgages that exclude them from traditional bank financing; and for those new to investing – it offers funding options that a traditional lender might not. So unlike the homeowner who has to prove income, existing debts and a whole lot more, an investor looking for asset based funding needs to document the viability of his or her property and it’s intended use and anticipated outcome.
There’s been an explosion of asset-based lenders in recent years because there’s a huge demand for investor financing. You know what they say – money follows opportunity, and lenders woke up the fact that real estate investors have been cut out of the traditional lending model and there has been pent-up demand existed for funding real estate deals.
There’s a yin and yang to everything, so here’s what to be aware of when considering using asset-based loans including hard money and private money loans.
The Good, Bad, Ugly and Facts of working with Asset-Based Lenders:
Good: Getting funded is easier than working with a bank
Bad: 99% of asset-based lenders will require you put at least 5% down.
Ugly: It’s a lot more expensive than a bank.
Fact: Funding can be acquired quickly
Fact: The borrower needs to document the project thoroughly
Fact: Repayment terms are short, typically 6 – 60 months
Fact: Loans must be in 1st position against the property
Fact: Loans are only giving to investors buying property at deep discounts.
Fact: Asset based lenders understand real estate investors
That’s the basics of asset-based loans for real estate investing. In a future post , we’ll get into more specifics about when and how to use hard money loans, private money loans and several other alternatives for funding real estate deals. Do you need a real estate deal funded? Click the Cix logo below to have asset-based lenders compete for your business.
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