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Real Estate Asset Based Lending

The real estate market is heating up again with houses and multi-unit properties in many regions approaching or surpassing pre-housing crisis highs. In many cities, such as San Francisco, New York, and Boston, residential buyers are finding themselves priced out of the market due to the personal income requirements of bank lending. In years past, the same requirements kept real estate investors from exploiting opportunities, especially if they were carrying mortgages from other properties. However, in recent years, a new type of real estate financing has emerged that enables investors to qualify for financing based on a property’s cash flow prospects rather than their personal income.Asset-based lending is taking the real estate investment world by storm, creating new opportunities for small and large investors to capitalize on a growing rental market. With rents increasing by as much as 15% per year in some markets, properties are valued for their cash flow, which is the key to unlocking the equity needed to finance them. Asset-based lenders view that cash flow as their security, which allows them to overlook an investor’s personal financial strength in approving loan deals.

How Real Estate Asset-Based Lending Works

Real estate asset-based lending is based almost exclusively on real estate assets used as collateral for financing. After receiving all of the financial documentation on the property, the lender will perform a cash flow analysis to determine the property’s viability as an asset. It will factor in the projected rental income and account for expenses such as property taxes, insurance and maintenance to arrive at a net cash flow. The analysis is used to determine the amount of loan, which can be as high as 70% loan-to-value (LTV). With most asset-based loans, the loan term ranges from one to five years, allowing enough time to prepare the property for resale or arrange for traditional refinancing.

Qualifying for a Real Estate Asset-Based Loan

The good news is that asset-based lenders don’t usually require an in depth application involving pages and pages of an investor’s personal financials. However, it does require thorough documentation of the property and the investor’s plans for managing it. To arrive at a loan amount and a rate of interest, the lender will consider the investment objective, the anticipated return on investment, the as-is and after repair value of the property and the investor’s exit strategy. The more detailed documentation and financials an investor provides on the investment, the more likely the lender will view it in the same light, though that isn’t always the case.

The other good news is that the application and approval process for an asset-based real estate loan is far easier and shorter than with traditional real estate financing. In many cases, an investor can have a loan approved and funded within one to two weeks. With most asset-based lenders, investors will be required to come up with a 5% down payment.

The Advantages of Real Estate Asset-Based Financing

Investors of any size or stripe can benefit from asset-based real estate financing, especially those who want to leverage cash flows across several properties and maximize loan proceeds. Property cash flows are the primary determinant of how much real estate an investor can buy. Beyond that, there are several advantages afforded to investors:

  • Loan qualification is asset-based, not credit-based
  • Financing not dependent on personal or business assets
  • Quick loan turnaround in a fast-moving market
  • Low down payment requirements

Real Estate Asset-Based Financing Lifts all Investors

For new investors who just want to invest in a rental property as a way to supplement their income, or seasoned investors who want to build their portfolio, asset-based real estate financing now makes it possible for anyone with a viable investment property to finance it using primarily other people’s money.  Asset-based lending breathes new life into real estate investors who have been turned down by traditional lenders due to carrying too much mortgage debt or not having sufficient personal income. If it can be clearly demonstrated that an investment property will generate sufficient positive cash flow to cover the mortgage payment and other expenses, a real estate asset-based lender is likely to step up.