You decided to purchase a rundown home to fix and flip it. You and your spouse are entering the fix-and-flip business as partners. The house will need many repairs, including plumbing and wiring replacements.
The project is going well for the first few weeks. As time goes by, however, you notice that the repairs have exceeded your budget. Small upgrades and replacements are slowly eating away your profit margins.
Then, you notice that water is seeping through the kitchen roof during a thunderstorm. A roofer later recommends a new roof, which would cost around $15,000. You don’t have the money to fix the roof, and you’re running out of cash to finish the repairs.
What can you do?
In this case, property-backed lending is a viable option. Asset-based lending will provide the financing you need if you pledge the home or other assets as collateral.
An asset loan provides the immediate cash you need to finish repairs on time. This article will show you the ins and outs of real estate lending. Let’s explore.
What is Asset Lending?
Asset-based lending for real estate can be a line of credit. With a credit line, you would draw from borrow from a credit account when you need it.
- Example: If you have a line of credit of $50,000 and decide to draw $10,000, you would back the $10,000 that you borrowed.
It’s a great alternative to term loans, where you must pay off an entire balance. Credit lines are a nice cushion in case you come across unexpected repairs or other issues that could cost you heavily.
How Can Property-Backed Lending Enhance My Fix and Flip Business?
Instead of paying out of pocket, you can use an asset loan to begin repairs. And, you can use the funds that you saved for the following purposes:
- Buying additional properties
- Paying contractors
- Purchasing tools and equipment
- Finishing projects faster
- One reason why fix-and-flip investors fail is that they overlook the amount of cash needed to finish the project. Therefore, renovators face delays due to cash constraints.
Fixing and flipping is a fast-paced business that burns through cash more than many people realize. An asset loan or line of credit can help you keep pace with the fast nature of the business. It will also help you meet tight deadlines and close deals faster.
In addition to repairs and renovations, the following barriers can cause you to lose cash:
- Building permits
- Material deliveries
- Holding costs
Holding can come in many forms, but the most common one is a mortgage. If you have a mortgage, you will have to pay it monthly until you can sell it, even after you complete the renovations.
With a mortgage also comes insurance and taxes on the property. Regarding taxes, local officials may raise your property taxes in light of the new renovations.
Therefore, you could face an exorbitant tax bill that can reduce your profits. You also have to worry about property upkeep, such as lawn maintenance.
Worst of all, you’re not sure how long it will take to find a buyer. A home that sits on the market for too long may force you to reduce the price, which may slash your profit goals exponentially.
If you’re hiring a contractor, you may come across delays that could increase your holding costs. Moreover, disputes with contractors are one of the main reasons why construction projects face delays.
An asset loan can help you cover all expenses pertaining to the property until you can get it sold. Also, property-backed loans can help you pay contractors or hire a new crew when necessary.
Most importantly, a loan will help you secure a steady cash flow in the future. Stable income can help you during project delays or market dips. Overall, you can improve your liquidity through a stable flow of cash.
What are Some Advantages of Property-based Loans?
Asset loans are usually easier to obtain than unsecured loans. With a traditional bank and lending institution, loan officers assess your worthiness based on such factors as:
- Credit scores
- Business income
- Debt-to-income ratio
A fix-and-flip investor may not have the proper credit score or income to get a conventional loan. And, traditional lenders tend to be wary about working with renovators, as they see the fix and flip business as a risky venture.
Conventional fix and flip lenders may also want to see a strong track record of success before lending money to you. Lenders that do offer fix and flip loans may also offer them with higher interest rates that could cost you a great deal in the long-term.
You don’t have to pay high-interest rates if you have a low credit score. You’ll find a variety of lenders who offer property-centered loans without high-interest rates or strict mandates.
With asset-based lending, you can pledge the home as collateral. Or, you don’t have to pledge the property as collateral. You can use any asset to get the loan you need. Or, you can pledge a combination of assets to get the loan.
With an asset loan, lenders are more concerned about the assets behind the loan instead of your credit or income. A collateralized loan can offset credit or income issues that may prevent you from getting loans or credit lines.
If you default on a collateral loan, however, a lender can seize your assets to satisfy the remaining balance. It’s a viable alternative for those who have struggled to get a business loan in the past.
Property-Backed Lending Done the Right Way
To get the right asset loan for you, find a lender that’s trustworthy and reputable. Avoid high-interest loans that may cause you to default in the future.
If you have sub-par credit, property-backed lending is more accessible than conventional loans. You can get financing sooner through a collateral loan.
Immediate cash stabilizes your fix-and-flip businesses and keeps you afloat during tough times. Contact a loan rep to learn how lenders can tailor an asset loan to your needs.
Want to learn more about asset-based lending? Click here to learn about asset loans from Strategic Capital.
Checking for pre-approval will not affect your credit score.