How To Use Property Value As Down Payment For Another Property?

Question

If I was to purchase a commercial property lets say for $600,000 and put 20% down payment of $120,000.  (Property A)

When I buy another property for $600,000,  (Property B)

How would I use the first property as down payment for the second property?

1) Can I use (Property A) full value $600,000 as down payment/collateral for (Property B)?

2) Or do I use the equity in (Property A) of $120,000 as a down payment/collateral  for (Property B)?

3) Or can I do both?

Can someone please explain to me how this works in detail? Thanks so much

Ronald Rohde · Answer

1. No, not if you have debt against it. Your equity hasn't changed

2. You cannot double dip the same equity.

3. The only way you can leverage your first equity is to reduce the LTV by increasing the value of the first, then you can put more debt on the first property.

Zach Alms · Answer

This is a good question and great way for someone to grow thier portfolio, the problem is that it typically doesn't happen overnight. In order to buy two properties for $600k with 20% down, you'll need $240k of equity. So the way to do this is buy property A for $600k with your $120k and significantly increase the value of property A. (Some good ways to do this could be to fill vacancy, raise rents, or lower expenses). You can also utilize the power of time and principle pay down over a period of time. So if property A's value never increases, you'll need to owe only $360k on that property in order to use the equity in Property A to buy another property worth $600k.

Hope this helps a little bit!