Real estate investors rely on fast funding to close deals. But what if you’ve exhausted your traditional financing options or can’t qualify for a conventional mortgage because you have irregular income?
Enter asset-based lending. Instead of focusing on your personal income, asset-based lenders like ABL focus on the value of the collateral securing the loan. As a result, they can be more flexible on loan requirements and terms.
What Is Asset-Based Lending?
Asset-based lending refers to loans backed by an asset. In real estate, this is typically the property being financed. Furthermore, the value of the collateralized asset is the main criterion by which lenders qualify borrowers.
Asset-Based Lending vs. Cash Flow Lending
One way to better understand asset-based lending is to contrast it with cash flow lending.
A cash flow loan doesn’t necessarily require collateral. Instead, the lender looks at the borrower’s current and future cash flow (as well as credit) to determine whether they can afford the loan. As a result, cash flow loans can be harder to qualify for since you must demonstrate personal creditworthiness and that you have adequate income to cover loan payments.
In contrast, asset-based lenders like ABL do require collateral. While they may also require a minimum credit score, their loan programs prioritize the value of the collateral when underwriting. This is why asset-based lenders have a loan-to-value (LTV) requirement, which limits the size of the loan they’re willing to extend to a percentage of the collateral’s value.
For example, ABL requires a minimum credit score of 660 and an LTV of up to 90% of the property purchase price and 100% of the rehab costs.
How Does Asset-Based Lending Work?
Now that you understand what asset-based lending is, here’s how it works:
Asset-Based Lending Example
Let’s say you want to buy a distressed property to renovate and flip. The purchase price is $100,000, and you estimate the renovation costs will total $50,000.
With ABL, you could borrow up to $140,000 to finance the deal. Here’s the math:
$100,000 x 90% = $90,000 for the property
$50,000 x 100% = $50,000 for the rehab
This leaves you with just $10,000 of the $150,000 to come up with on your own as a down payment. Meanwhile, you can pay as few as 0 points to close.
After the loan closes, you’ll start making interest-only payments to keep the cost of borrowing low during the most cost-intensive phase of a fix-and-flip or new construction project.
Then, once the loan is due (typically after 12 months), you can repay the balance with the sale proceeds from flipping the property or refinance into a long-term rental loan.
How to Qualify for Asset-Based Loans
To qualify for an asset-based loan, you must meet the lender’s loan requirements and agree to their loan terms. Here’s what to look for:
Typical Loan Requirements
- Credit score. While asset-based lenders don’t focus on your credit, they often still have a minimum credit score requirement. At ABL, it’s 660.
- Property type. Some asset-based lenders only finance certain property types. ABL finances single-family, multi-family, and condo properties.
- LTV. Asset-based lenders set a maximum LTV at which they’re willing to lend. For example, ABL will finance up to 90% of the purchase price and 100% of rehab costs.
- Experience. Some lenders require borrowers to have investment experience. ABL lends to borrowers of all experience levels, except for on new construction projects.
Typical Loan Terms
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- Loan size. Most lenders have a minimum and maximum loan amount they’re willing to lend (regardless of LTV). At ABL, you can borrow as little as $75K or as much as $50M.
- Term length. Asset-based loans are typically short-term bridge loans. As a result, loan terms are usually 12-24 months.
- Collateral. Every asset-based loan requires collateral. Though this is typically the property being financed, it can also be another property you own.
- Interest rate. Interest is the cost of borrowing, and the interest rate varies by lender and market. At ABL, we offer interest rates as low as 6.99%.
- Origination fees. Most lenders charge a small percentage of the loan amount to process your loan (aka points). However, ABL offers loans with as few as zero points.
- Repayment structure. Most asset-based loans allow you to make interest-only payments with the balance due when the loan matures. That way, you can keep your costs low during the most cost-intensive phase of a construction or renovation project.
- Prepayment penalty. Some asset-based lenders charge a prepayment penalty if you pay off your loan early—but not ABL. We want to reward you for finishing early by letting you keep any interest cost savings.
- Personal guarantee. Many asset-based lenders, including ABL, require you to make a personal guarantee that you will repay the loan if your business can’t.
Common Mistakes to Avoid
Asset-based financing can be a great way to seize deals, expand your portfolio, and maximize your returns. However, you must avoid some common mistakes:
Overestimating After-Repair Value (ARV)
After-repair value (ARV) is how much you expect a property to sell for after renovations. A high ARV ensures you can pay off your loan and make a profit. However, if you overestimate the ARV, your returns will suffer, and you may even struggle to repay the loan.
Underestimating Construction and Holding Costs
Don’t forget to factor in construction costs (labor, materials, equipment, etc.) and holding costs (property taxes, home insurance, utilities, interest-only payments, etc.) when determining how much you need to borrow.
Not Having a Clear Exit Strategy
A clear exit strategy for how you will resell or refinance the property reassures lenders that you’ll pay the loan back on time.
Assuming Your Credit Score Doesn’t Matter
While asset-based lenders may not focus on your credit score, they usually still require it to pass a minimum threshold.
Partner with ABL
Take your real estate investing to the next level by partnering with ABL. We offer asset-based loans for fix-and-flips, new construction, and cash-out refinances. Plus, our local teams can guide you through the borrowing process to ensure a smooth experience. Pre-qualify today!