HELOC or lien?

Question

I heard local banks will use your equity in existing properties as a down payment for an acquisition by placing a lien on that property. In the past I have taken out a HELOC, used that as the down payment for the next property then paid off the HELOC over time. But those were 1-3 unit buildings and now I want to buy a 5+ unit residential building that might require major rehab. Which method is going to be successful with the bank? They are conceptually the same thing of course, but in practice I would like to know what will work better to smooth the application. I will be asking the banker this but want to survey before I do.

Has anyone used their equity as collateral in an acquisition, but not via a HELOC? Did they still have to put money down and what %? If you paid down your mortgage on the new property would they release the lien on the older property at some point?

I have 25-35% equity on 3 properties, 1 of which is my primary residence.

Has anyone used their equity as collateral in an acquisition, but not via a HELOC?  Did they still have to put money down and what %?    If you paid down your mortgage on the new property would they release the lien on the older property at some point?

I have 25-35% equity on 3 properties, 1 of which is my primary residence.

Jeff S. · Answer

25% to 35% doesn't sound like a lot of equity. High high do you think they will go?

Dion DePaoli · Answer

First thing first, the subject property you speak of (5 unit residential) is not considered a conventional residential property.  Conventional residential properties are 4 units or less.  So the loans for which you can qualify are now a little more limited.  A 5 unit complex will be treated more like a commercial loan.  That may work to your benefit.

Any time you encumber more than one property and tie it to the same note you have "cross collateralized" the note.  This would mean the lender files a security instrument (deed of trust/mortgage) against all properties given as collateral.  Sometimes the equity found in all the other crossed properties beside the subject property is refereed to as "Boot Equity".

Offering the equity of additional property is typically not a supplement for putting cash into the deal.  But that is not a rule written in stone.  The additional collateral is thought more of a reason a borrower will ensure they debt service opposed to an offset of down payment.  In some situations if the boot equity offered is from the primary residence the lender will not take it all.

Getting a HELOC, provided you and your property qualify is it's own loan.  You will have to qualify for this loan all by itself.  Assuming that works, the lender might restrict the use of HELOC funds for down payment of the commercial loan.

That being said, the bank might be very willing to bundle all that up and give you a loan.  The SBA has some loan programs which you might want to see if your bank or a bank around you can write as well.  Those programs include purchase and rehab monies.  Because you have step outside of the realm of residential property the rules change.  Sample a couple different small banks by you, they might have different programs.      This will mean they way the underwrite the loans will be different.  Don't confuse conventional residential loan criteria with the world you walk in now, it will be different.

Cheryl C. · Answer

Somer, it seems that it would be alot "cleaner" to just use your heloc's for the dp and rehab.  A "blanket trust" would entail alot of appraisals and title work, closing costs, etc.  I had one in the 80's and I wouldn't have needed it if I had some heloc's (I don't think they were available back then).  A lender is going to look at your overall LTV and it appears you are maxed at 25-35% equity already - in other words, there is no room to lend on your current properties - so a "blanket trust" doesn't move the ball forward.  I am assuming your heloc's allow a higher LTV on the properties encumbered.

Paul M. · Answer

I don't know what the bankers would do regarding the blanket loan strategy, since I don't have experience with that technique.

For the HELOC strategy, I have HELOCable equity equal to 25% of the acquisition/rehab costs.

Paul M. · Answer

I think from subsequent internet searching that what I'm referring to may be called a "cross collateralization loan"

HELOC or lien?

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