Asset

An asset is something of value that you own. Your car, home, and financial holdings are all examples of assets. These assets play a crucial role in determining your overall value, which is an important metric that many lenders look at.

While there are countless types of assets, some of those asset types aren’t relevant when you’re talking about hard money loans. Things like intangible rights and financial holdings don’t typically come into play when you’re borrowing money as a real estate investor.

Assets are related to hard money loans because hard money loans are asset-backed loans. An asset-backed loan is a loan that’s backed by tangible property, such as a piece of real estate. These loans make it easier to get approved if you’re having trouble meeting traditional loan requirements.

When you take out a hard money loan, you’re using an asset you own as collateral. For example, you can use another piece of real estate as collateral to secure a loan to invest in more real estate. These are short-term loans compared to traditional mortgages, which makes them ideal if you’re looking to stay active and fluid as an investor.

Assets are a relatively simple concept: Anything of value that you own is considered an asset. Whether you’re a homeowner, a real estate investor, or a classic car collector, you have assets. We’ll go into more detail about how these assets work, how their value is determined, and more below.

When you’re using an asset to secure a loan, the value of that asset is important. So, how is the value of an asset determined?

There are three methods for determining real estate asset value — market comparison, income approach, and cost approach.

Let’s take a look at some real-world examples of assets and how they might play a role in your life. We’ll look at two different examples to help you understand how assets work in real estate.

In this example, we’re looking at a homeowner who purchased a primary residence and paid off a 15-year mortgage. Let’s say the home was initially purchased for $150,000, and that principal amount has been completely paid off. 15 years later, the home is valued at $400,000 due to market fluctuations. The value of the asset would be $400,000.

If this homeowner wanted to invest in real estate, they could use that $400,000 equity to secure a loan. However, they would also be putting their home at risk if they default on the loan.

In this example, we’ll look at a first-time homebuyer who purchased their home a few years ago. Since the home was purchased somewhat recently, the mortgage hasn’t been paid off completely. Despite having $100,000 to pay off, this homebuyer still has $50,000 equity in the home. This property owner would be able to use that equity to secure a loan, but the loan would be significantly smaller than the first example.

Homeowners might have other assets — like boats, cars, and trailers — but those aren’t typically considered for real estate investing loans.

As an investor, it’s important to understand what you’re getting yourself into before you take out a loan. While assets and their associated loans have benefits, there are also some drawbacks to consider.

Perhaps the biggest advantage of stockpiling assets is your ability to use them to bolster your financial position and secure loans. If you have equity in your home, you can use that equity to start investing.

Asset-backed loans are also simple, so you can receive your funding and start investing sooner.

While using assets to secure a loan can be smart, it can also be risky. If you default on a hard money loan, you lose the assets you used as collateral to secure the loan.

Asset-backed loans may also come with less favorable terms, especially if you can qualify for VA loan programs instead.