Using one property as collateral/down payment for another

10 Replies

Hello lenders and experienced BP investors out there....

How realistic is it to ask a conventional lender or private lender to use one property (a SFH owned free and clear), worth $75K, as collateral instead of a down payment (or maybe have a small down payment, but nothing close to 25%) for another property worth $130,000? Would lenders accept this arrangement? The second property has tenants in and rents would more than cover mortgage payments, and this collateral represents >50% of property value. Any thoughts, suggestions of where to look or other ways of going about this are very much appreciated!!!

Have you considered getting a HELOC, to use as a down payment? You would be putting an awful lot at risk by using your home as collateral.

Hi @Nicholas Myers -

I would prefer not to have payments on two properties if I can avoid it. Plus interest rates and terms on HELOCs are not as favorable. I am pretty sure there are people who have cross-collateralized their properties to finance more properties, I am trying to see how I can use that. Thank you for your suggestion!

I would say that the best thing that you could do is to meet with your bank's loan officer or even branch manager and ask questions. Banks will usually be willing to use a certain percentage of something as collateral depending on what the collateral is. The percentage on residential owner-occupied houses is usually one of the higher percentages. But, you won't know what that is until you talk to them. Remember that banks need you as much as you need them so don't be too nervous when talking to them. Just tell them exactly what your plans are and ask how you can work with them so that you both win.

Thanks, @Nathan Reed ! The property I want to use is not my home, but another rental. Even though they only use part of the value of the property, it would help. I do plan to meet with my loan officer next week to see what she says. But knowledge is power, so I want to see what other people's experiences have been with this technique so I am armed with the different possibilities when I go to the meeting. :) And you are absolutely right that banks need us and that should give us more confidence in negotiating with them

Thanks for sharing your insight!

Hi Patsy,  good advice from Nathan. It is common for hard money (asset based) lenders to allow cross collateralization of a property you own to cover down payment for another investment property.  This flexibility is an advantage of hard money lending. The general rule is to allow up to 65% of the equity in the crossed property to be available for this.  Be careful that you or a family member do not live in the property being purchased with this type of financing, as these loans are business-purpose only, exclusively for investment properties.

@Brent Myotte

Thank you for clarifying. This sort of info is exactly what I need! 65% of my current rental is 35% of the purchase price of the other property, which is more than enough. Would a hard money lender accept the collateral as the only down payment, or would they also require some cash?

Also- the second property is another investment property, no plans at all for anyone in the family to live there.

It sounds like this will work for you. Most HMLs will allow the entire down payment to be equity from a cross collateralized property. You can also take a portion of equity from several properties to make the amount needed available. Crossing several properties in this way is a little more complex so you want a lender that is familiar with how to do it. Generally, the recorded instrument that places the lien for the cross is in first position, so other liens will have to be subordinated to it. Also keep in mind that the loan fees and other costs cannot be included in this, so those amounts must be cash brought to close the transaction.

Your best rate and terms are always (99.9%) going to be one loan on each property. What is the concern with two loans? It's the same amount of liability on your balance sheet. If the loans were super small and the double closing costs outweighed the interest rate I guess I could see one in your case. But generally you want one loan on each property if you can. As everyone is saying, HML's can do it, but who wants hard money if they don't have to?


@Brent Myotte

Thanks for the additional detail. I anticipate only using one property, so it shouldn't be too complex. Good to know about closing costs, I figured as much but it's good to be certain. I should be fine covering the closing costs with cash.

@Matt Hoyt

No concern with 2 loans at all, just want to keep things simple by only taking 1 out. Not sure how double closing costs vs. interest rates will look like in this case, that's a really good point that I hadn't thought of. I'll have to explore that with my lender to see which one allows me to come out ahead. I use a private lender because I am self-employed and traditional banks are a nightmare to deal with.

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