My property as a colateral?

[Olga Kostrova]

Hi guys,

I had just had a conversation with a local lender. Not the lowest rates but I enjoyed the team I've met so far.

They agreed to fund 100% of both purchase price and rehab costs for a fix and hold (rent) deal, but since it's our fist deal with them they want to put my other property (that I own free and clear) as a collateral.

My question is, how would it look like?

Let's say market value of the home I own in Virginia is $250K.

Let's say, the property I buy for rental is $220K purchase price including closing costs, $60K rehab, $300K ARV.

So, let's say the are giving me a short term loan of $280K that after rehab i would refinance (70%). Then the only portion of my property I should collateralize is $30K, right?  Not sure how it's done, but it definitely wouldn't make sense for me to put the entire property as collateral, as the total value of 2 properties greatly accedes the amount of the loan.

What is the reasonable way to structure it that is fair to me and yet gives a lender a peace of mind?

Would refinancing my own property (70%) and put it as a downpayment be a better decisions for me, financially? The problem with this, I can't really leverage and scale, as I only have 1 (well, the 2nd is in Europe, so that wouldn't count). And after 1 deal is complete the lender then doesn't need my property as a collateral and can land 100% on all future deals as they gain comfort in working together.

And if I do put property as collateral, what are my risks and how to avoid them?

Thank you...

[Andrew Garcia]

Hi @Olga Kostrova, this is really a question for your lender.

I know for a fact that the lender will not only collateralize $30k. 

This sounds like a private or hard money lender so the terms should be negotiable.

Whether refinancing your current property is the right move or not is really a question of comparisons in rate. If you put down 10-20%, would you get better rates?

You can also look into a HELOC if you are going to pay this HELOC off fairly quickly.

The main risk with cross-collateralization is that if you default, you lose both properties. There is really no way to avoid this unless you don't cross-collateralize.

Hope this helps! Let me know if I can be of any assistance.

[Olga Kostrova]

Thank you, Andrew Garcia...