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The Growing Role of Asset-Based Lending in Real Estate

On the surface, real estate investment may look the same as buying a new
residence. But these two types of purchases are financed very differently. While
banks primarily base the loan for a primary residence on the borrower, the financing
for an investment property focuses much more on the value of the asset itself.

Asset-based lending is the best way for real estate investors to purchase properties to flip or to hold in an investment portfolio. It allows investors to unlock the potential of a property without relying on personal debt-to-income ratios and often to get financing without submitting tax returns. Anyone looking into real estate investment needs to look beyond traditional debt-to-income lending to scale their portfolios. Let’s dig into how investors do this.

What Is Asset-Based Lending?

Asset-based lending is financing based on the value of a property. Essentially, it is the same as hard money lending, which is based on the value of a “hard” or tangible asset like real estate. Unlike hard money lending, asset-based lending has few negative connotations and can also be obtained at interest rates close to forward mortgage rates.

Asset-based lending may focus on the loan-to-cost (LTC) ratio for a fix and flip property or a new build, lending a percentage of the costs of purchase of the property or land, as well as the costs of rehab or construction. If a property is ready for renters, the loan amount will rely on the loan-to-value (LTV) ratio. Typically, a lender will list a leverage, which indicates what percentage of the cost or value it will finance. At Lima One Capital, we will lend up to 92.5% of the costs of a fix and flip, or up to 80% of the value of a rental property, depending on the borrower’s experience and investment strategy.

Notice that these asset-based loans do not rely on the debt-to-income ratio of the investor. While investors will have to show an adequate credit score and enough liquidity to successfully complete the investment project, they will not be limited by how many other investment property loans they have. Nor will they have to demonstrate a W-2 income—which is ideal for investors who may not have a full-time job but who do have multiple income streams from rental properties, flips, and other endeavors.

Assets used as collateral

In asset-based lending, the real estate property is the core asset used as collateral for the loan. Typically, investors are not required to put down other collateral, as they might be for other types of loans.

Asset-Based Lending vs. Cash Flow-Based Lending & DTI-Based Lending

• Compare asset-based lending vs. cash flow and debt-based lending models and the main contrast between each
• Pros and cons of each for real estate investors
• When it makes sense to go asset-based

As we have seen, asset-based loans are very different than debt-to-income-based loans (which can also be called cash-flow lending). Investors can use both strategies, especially when building a rental portfolio.

Debt-to-income mortgage loans, like the ones available through banks and credit unions, can offer lower down payments that help investors purchase their first few rental properties. However, investors will run into limits with these loans because of FHA guidance, debt-to-income ratio assessments, or both. This will limit an investor’s ability to scale.

On the other hand, asset-based loans allow investors to continue growing their portfolios. Cash-out refinances can also let investors use the equity in their current properties to purchase additional ones. This is the major advantage of asset-based lending.

Types of Asset-Based Loans for Real Estate

Asset-based loans can take different forms, including:

Rental Loans: Leverage property value, not personal income

Rental loans based on loan-to-value ratios are ideal for asset-based lending. They are based on the cash flow of the asset, as measured by the debt service coverage ratio (DSCR). They allow for cash-out refinances that use the equity in property to be used for future purchases.

Fix and Flip Loans: Short-term value-based lending

Fix-and-flips can also be financed based on the property asset. The difference between these loans and rental loans is that a fix-and-flip loan considers both the current as-is value of the asset as well as the after-repair value (ARV).

New Construction Loans: Finance builds based on project value

The asset in a new construction loan is the entitled land that is ready to build on. Asset-based loans can finance the land and construction costs, with underwriting based on those costs as well as the expected value of the completed property.

Bridge Loans: For time-sensitive opportunities

Bridge loans are short-term loans that use the same asset-based lending approach as rental loans. Investors can use bridge loans for time-sensitive purchases or refinances that continue to build equity that can be leveraged for future purchases.

Benefits of Asset-Based Lending

Asset-based financing offers several distinct advantages over traditional mortgage financing, especially for real estate investors seeking speed, flexibility, and alternative qualification criteria. Below are the key benefits:

Faster Approval and Funding

• Quick Turnaround: Asset-based loans typically have a much faster approval process than traditional mortgages, allowing investors to secure funding within days instead of weeks or months.
• Less Paperwork: The process is streamlined, with less emphasis on extensive W2 income verification and debt-to-income verification.

Easier Qualification

• Asset-Focused Approval: Qualification is based primarily on the value and cash flow potential of the property, rather than the borrower’s personal income or type of employment.
• Accessible for Non-Traditional Borrowers: Ideal for self-employed individuals, retirees, or those who already own multiple investment properties.

Greater Flexibility

• Flexible Terms: Asset-based loans often provide more flexible repayment options and can be tailored to the investor’s needs and cash flow. For example, an investor can choose a short-term, interest-only bridge loan or a rental property loan with a 30-year term.
• Flexible Use of Funds: Funds can be used for a variety of purposes, including property acquisition or renovations.

Higher Borrowing Potential

• Larger Loan Amounts: Because loans are secured by the property’s value, investors may qualify for larger loan amounts than with income-based lending. These loan amounts will be based on LTC or LTV ratios.

No Income Verification or DTI Requirements

• No Income Documentation: Many asset-based loans do not require income verification or calculation of debt-to-income (DTI) ratios, making them accessible for investors with non-traditional income sources.

Opportunity for Portfolio Growth

• Leverage Existing Assets: Investors can use the equity in their current properties to finance additional investments, supporting rapid portfolio expansion.
• Cash-Out Options: Asset-based loans often allow for cash-out refinancing, enabling investors to access equity for further investments or renovations.

Ideal for Time-Sensitive Opportunities

• Competitive Edge: The speed and flexibility of asset-based financing allow investors to act quickly on time-sensitive deals, such as property auctions or distressed sales.

Choosing the Right Asset-Based Lender

Once you have decided on an asset-based loan for your next investment, choosing the right lender becomes paramount.

Make sure that the lender has the processes and team to underwrite and close asset-based loans quickly. Banks are used to moving slower, while private lenders like Lima One move quickly to meet investor timelines.

Private lenders also have underwriting and processing teams that are familiar with analyzing rent rolls, finding landlord insurance, and addressing other closing items that are unique to investment properties.

A nationwide asset-based lender like Lima One Capital offers these advantages on rental loans, fix and flip loans, bridge loans, and new construction loans. This full product suite of investment property loan types may not be available at all asset-based lenders.

Unlocking Growth Through Asset-Based Lending

Asset-based loans are the secret weapon that allows investors to scale their businesses by growing their portfolios and/or doing higher-value flips. Any investor looking to grow needs a strategy on how to put asset-based lending to work for them.

Lima One’s asset-based loans can help investors achieve this kind of growth, and our experienced team of loan consultants can help investors of any experience level find the best way to use this kind of financing. Contact us today to start a conversation.