Cross Collateralization Loan
Attempting to find a lender who would be willing to accept cross collateral in the form of a free and clear property to purchase a small multi family property that needs light rehab. Fix and flip loan or DSCR would work for my current needs and situation.
I and the properties are located in Florida of that makes any difference.
We may be able to make that work. It may also be easier to do two simultaneous transactions. Let’s connect!
www.modernmortgagemi.com/commercial
Aloha @Michael Vernese,
Portfolio/Blanket/Cross Collateral Loans can be great so long as you are aware of the longer term implications of having that type of loan in place. These loans are great for consolidating a payments and allowing you to close multiple properties under 1 loan closing which helps to save money on processing fees and closing costs.
The biggest item that lenders and loan officers don't educate their customers around is the "partial release clause". You definitely want to be asking about this with any lender you're talking to about this. If they say there's "no partial release", then DEFINITELY get that in writing and be SURE it's not otherwise stated in your loan documents at closing. I have met many loan officers that have misinformed their clients on this. The industry standard is a 120% Partial Release.
Let me explain in an example:
You have 2 properties worth 125k each. You get an 80% LTV cross collateral loan to buy both properties 125k x 80% = 100k loan amount for each property.
Total Loan Amount = 200k
In the future, let's say you decide one of these properties is not worth keeping and you want to sell it. Here's what happens if you have a 120% Partial Release Clause:
Assume the property for sale, Property A, appreciated to 140k. The unpaid balance associated with that property is 100k. Because you have the Partial Release Clause, you have to pay off 100k x 120% =120k payoff. Since you're selling, you'll have selling costs and closing costs (assume 10k). You're walking away with only 10k in your pocket after you sell in this case.
The property that still has a loan balance against it, Property B, only has a 80k loan balance now. What you can always do in this case to avoid the Partial Release Clause is to refinance the Property B and close the refinance on the same day that you sell Property A; however, at this point you're now paying for the 2 closings that you were trying to avoid when you cross collateralized in the first place.
The Takeaway
If you're going to get into a cross collateral/blanket/portfolio loan, make sure that you don't see any future where you're going to want to sell 1 of the units. If you have the mentality of: once a together, always together, these types of loans are great. That said, after learning this, many investors opt to pay the extra costs to have 2 separate loans just to have the option in the future to separate them.
If you ever want to chat about this in more detail, we're happy to jump on a call to discuss your actual scenario/numbers. Either way, we want what's best for you and wish you the best of luck and aloha.
Depending on how the numbers work out, you could possibly do a bridge on the free and clear property, use those funds to purchase/rehab the other property, and then refinance both into one loan once the rehab is completed and before the balloon is due on the bridge. Depends on what the value of the free and clear property is and what the other one would cost to buy/rehab. You could also just cash out on the free and clear property and use those funds for the second property and keep them separate from each other. When cross-collateralizing, lenders usually require that all transactions are like-kind, meaning purchases or refinances, noth both. Feel free to reach out if you have questions or need anything, happy to help.
- Brittany Minocchi
- [email protected]
- 330-354-6590
This would work . What is the credit score and how are the rents looking ? I recommend doing a cashout and then a purchase loan and keep them individually
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Are you looking for a bridge cross, to use the equity in the home and come with no money down? Or are you looking to cash out on the equity and then use that as a down payment + rehab for the new purchase?
How many units is the MFH? Are all units occupied? What is the price point of the MFH?
- Erik Estrada
- [email protected]
- 818-269-7983
@Michael Vernese Need more information but on the surface it seems like something that could be looked at. Sent PM
Hi Michael,
Yes it is possible to cross-collateralize properties for growth. Many lenders have specific requirements on hold times and availability to sell one of the properties and still maintain the loan. Let's have a conversation about your needs and loan requirements.
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Sorry for the delay in responding. Thank you to everyone who took the time to respond! I believe I have replied to the networking requests and PM's received. If you didn't hear back from me please feel free to reach back out.