When you have lots of capital tied up in properties, it can be hard to scale your real estate investment portfolio. So why not leverage your equity? Unlike traditional mortgages based on creditworthiness, asset-based loans (aka hard money loans or private money loans) focus on the value of the collateral itself.

What Are Asset Based Loans

An asset-based loan is any loan secured by an asset, where the loan amount is determined mainly by the asset’s value.

In real estate, the collateralized asset is almost always the investment property being financed (owner-occupied homes don’t qualify). For example, if you need money to fix and flip a distressed property, the lender would base the loan amount on the property’s current or after-repair value (ARV). 

This differs from traditional mortgages that weigh the borrower’s credit or income more heavily. It also differs from cash flow or DSCR loans, which mainly look at the property’s ability to generate income and cover the debt service. 

How Asset Based Loans Work

Now that you know what an asset-based loan is (and isn’t), here’s how it works:

The first step to approving borrowers for an asset-based loan is determining the value of the collateralized property. This can involve any or all of the following:

• Analyzing local real estate supply and demand trends
• Comparing recent sales of similar properties nearby (aka “comps”)
• Running a direct capitalization valuation (dividing the property’s net operating income by a relevant cap rate)
• Commissioning a professional appraisal, inspection, and land survey
• Estimating ARV based on proposed development or renovation plans
• Accounting for future risks (e.g., a market downturn, falling interest rates, etc.)

Once the lender has settled on a value for the collateralized property, they will typically apply a preferred loan-to-value (LTV) ratio to determine the maximum amount they’re willing to lend. 

For example, a lender may require an LTV of no more than 80%. If they value the property at $100,000, this means they’d be willing to lend the borrower up to $80,000 to purchase it. In other words, the lender would require the borrower to put down 20% (the other $20,000). 

Lastly, although asset value is the main factor in determining the loan amount, an asset-based lender may still assess the borrower’s investment experience, proposed exit strategies, and even credit score to further support their underwriting decision. 

After closing, the borrower receives a lump sum or installments based on construction milestones. Typically, the loan term is 12-18 months, during which the borrower makes monthly interest-only payments and after which the principal balance is due. 

Benefits of Asset Based Loans

For a cash-strapped investor, asset-based loans can be a great way to get a real estate project off the ground. Here are some key benefits:

• Accessibility. Asset based lenders care less about your credit or income and more about the value of the collateral you put up. As a result, asset-based loans are usually more accessible to entrepreneurs and small business owners lacking W2s or income statements.
• Quick approval and funding. Since asset-based lenders rely less on verifying your personal financial history, they can process loans faster. For example, ABL closes most of its loans within two weeks of you contacting them. 
• Flexibility. Compared to conventional mortgage lenders, asset-based lenders are subject to fewer regulations, allowing them to be more flexible on loan terms. They can also cater to many types of real estate projects, including fix-and-flips, new construction, and cash-out refinances. 
• Interest-only periods. Many asset-based loans only require borrowers to make payments on the accrued interest, while the principal isn’t due till the end of the loan term. This helps keep payments low during a project’s most capital-intensive construction phase.

Potential Drawbacks of Asset Based Loans

Of course, asset-based loans aren’t for everyone. Consider some potential drawbacks:

• Higher interest rates. Asset-based loans tend to have higher interest rates than conventional mortgages due to the increased risk to the lender. They’re trusting in the current and potential future value of the asset, above all else.
• Assets at risk. Anytime you put up an asset as collateral on a loan, you risk losing it. If a construction or renovation project doesn’t go as planned and you’re unable to pay off the loan, you could end up in a tough situation. However, ABL has a low historical foreclosure rate, and we’ll help ensure the project is successful for you and us.

How to Get an Asset Based Loan

If you decide to pursue asset-based financing, here’s what to do:

1. Assess the property. Determine the market and after-repair value (ARV) of the property you want to finance. This will help determine how much you can borrow.
2. Research and compare lenders. Shop around for the best interest rates, LTV requirements, fees, and other loan terms. Don’t forget to check for positive reviews from past borrowers. 
3. Submit a loan application. Be prepared to provide detailed information on the property, your investment and exit plans, and your track record with similar projects. 
4. Review and negotiate loan terms. After the lender has performed their due diligence and made an offer, review the loan terms and negotiate any adjustments if needed. 
5. Close on the loan. Sign the final loan documents to start receiving funds and making necessary payments. 

Get Started With Asset Based Lending

If you’ve exhausted your credit sources, the right asset-based loan could be the bridge to your next deal.

At ABL, we’ve funded over $2.4 billion in hard money loans since 2010, gathering 500+ 5-star reviews along the way. We also know investors often need to act fast, which is why we pre-approve loans within 24 hours and close in as few as 3 days. See if you pre-qualify today!