Getting 100% Financing On Your Investment Property
Real estate investing almost always demands substantial capital. To overcome this hurdle, savvy investors often bring in equity partners that bring money for a share in future profits. One powerful strategy that is often overlooked (and does not require an equity partner), is cross-collateralization.
What is Cross-Collateralization?
Essentially, cross-collateralization involves using an existing asset, such as an investment property owned (free & clear), as additional security for a loan on a new property. This innovative approach can unlock significant opportunities for investors seeking to expand their portfolios without substantial upfront cash.
How Does it Work?
Let’s say that you own an existing rental property outright, valued at $200,000. Then, you come across an opportunity to acquire a new investment property worth $240,000. A private lender would usually require a borrower to bring 15-20% (say $40K) as down payment to acquire this property. Instead of bringing your own cash, you could offer your existing property as additional collateral (“cross-collateral”) for the entire purchase price of the new property.
By combining the value of both properties, the lender's risk is mitigated, often allowing them to approve a loan for the full purchase price. This strategy effectively transforms your existing asset into leverage for acquiring new properties.
Real-World Example
A client approached us asking for a loan on a 3br/2ba investment property in South Texas. The acquisition price was $110,000 with $65,000 budget for renovations. They planned to sell the property with an ARV of $265,000. Although the deal made sense (Loan to Value < 65%), the borrower was short on cash, and we were about to pass on the loan. That was until we learned that the borrower owned a nearby rental property.
By cross-collateralizing these properties, we were able to fund the entire $110,000 purchase price and related closing costs and fees. The borrower did not bring any money to the closing table. In this scenario, there was one promissory note and one deed of trust with liens on both the newly acquired property and the existing rental property.
Upon selling the “flip” property, both properties were released from the existing lien. The borrower plans to continue executing with this cross-collateral strategy to minimize the cash needed and to grow faster.
“Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
Robert T. Kiyosaki
Pros & Cons of Cross-Collateral
· Pros
Reduce or eliminate cash to close
Increase leverage
Increase return on investment
Grow more quickly
Repeatable
· Cons
Requires more underwriting (2 properties vs 1)
Requires a new lien on an previously unencumbered property
The entire loan could become due if either property is sold/refinanced
The benefits of cross-collateralization extend beyond the initial purchase. By strategically refinancing properties and freeing up equity, investors can repeatedly
Would you like to explore specific scenarios or discuss potential challenges related to cross-collateralization?