Equity from one investment for down payment on another.

5 Replies

I would like understand this concept correctly.

If I purchase Property A-Duplex for 70K and it is worth 100K and I put 10K down, I will then have 40K in equity in the property upon purchase.  If I would then like to purchase Property B-Duplex and use the 40K equity from Property A, how exactly would the bank view this.  Would they see me as having 2 loans on Property B (the equity loan and the mortgage loan), or would they roll all of this together and make it one loan?

Suppose Instead I used that 40K in Property A equity to put down two 20K down payments on Properties B & C.  How is this viewed?  Is this something banks discourage?  It seems that leveraging (using) the mortgage payments to build quick equity and then using that to fund new investments would be a much faster way to build a portfolio of properties rather than only saving from my W2 job each month.  Any information on this topic is greatly appreciated.

Thanks,

Assuming A and B are not two halves of the same duplex, I think you will look a long time (maybe forever) before you would find a lender who would consider equity in one property as a downpayment toward another.  Downpayment typically = cash or equity in the subject property.  

I am confident no conventional loan would work like this. I have never heard of any commercial or portfolio loans working this way either - unless you were financing as a package, in which case each property's equity above the price would contribute toward the "downpayment" for the package assuming the LTV is based on the ARV.

Equity doesn't really exist until you sell the property - until then it's an estimate of equity.  It would be surprising if a bank would allow you to use equity as a downpayment.

Why don't you do a cash-out refi on the property so that the equity is now realized as cash?

I actually have seen where portfolio lenders advertise using one property as down payment on another, but have not experienced this, and when I have spoken to their loan officers, generally do not get an answer on whether they would actually do it.

More importantly, you will learn that even with a cash-out refi, you will likely not find anyone who will lend more than 70 - 75% of appraised value, and with the cost of the loan, it would likely not be worth it to you for the 10 - 15K you could potentially take out if you currently owe 60K on the 1st mortgage.  It's our experience that, while it makes your net worth look good on paper, the first 25% equity in property is pretty much invested for the long haul, either until the property value increases dramatically or until the tenants pay down the mortgage enough to make it worth the cost of the loan to get your money back out.     

No bank is going to lend cash based on only ~40k equity.  I wanted to cash out the equity of my home for 75,000 and every lender was telling me no.  I had to bump it up to 89,000 or higher to get the loan.

Another problem is, you'd pay closing on the equity cash out and both of the properties' mortgages (A and B).  If the money isn't going to principal or in your pocket, it's interest.  Now I will say that if you have 100% equity in a home, a cash out refinance is the best "construction" loan you can get.  Depending on the construction costs in your area of course.

That's the problem with home loans though, you're not making 'quick' equity.  You're building equity, but very slowly.

Real estate investing will teach you patience, that's for sure. If that duplex is looking like it will make money, purchase it and rent it out.  Keep your day job and save for down payments.

That's disappointing to hear.  I was hoping I could invest in a property that I know of that is undervalued and end up with instant equity that would help me leverage another property, but it looks like it's not going to happen that way.  

Thanks everyone for the replies.

Brandon