Cross-Collaterization/Pledging Equity as DP

[Mehran K.]

I'm looking to get more info on the ins and outs of how it works when you cross-collateralize (CC for short)a property you own free & clear towards an acquisition you're looking to finance. My portfolio lender allows 80% LTV on cash outs and purchases for their commercial loans.

For numbers sake:

Property #1 Appraised @ $100k (owned free & clear)

Property #2 Purchasing/appraised for $100k (want to finance)

1. Do they place a lien on property #1 for $20k? Or is there some other type of documentation/contract that would have this same effect? Just wondering the logistics of how it actually happens on paper.
2. Would I be able to CC property #1 four times (80% LTV) to purchase 4 properties? Or does it not work that way.
3. Would I be able to sell either property independently of one another? How does that play out? I don't know the answer to the first question yet, but my guess would be If I sell either property, then I'd have to pay off the lien on #1 as part of the sale regardless.
4. Is there anything I need to be mindful/aware of that is often missed when trying to sell either property #1 or #2 in this situation? If there is anything maybe I just haven't considered, that you feel is important regarding CCing, please share

Tagging a few people: @Bill Gulley , @Jimmy Moncrief

Because I'm a tax newbie: @Steven Hamilton II Anything abnormal about doing this, tax-wise, as opposed to just doing cash out refinances and purchases? Can't think of any reason why there would be, but who knows!

Thank you to everyone who weighs in, in advance. I really appreciate it :)

[Waylon Themer]

Echoing much of what has been said already but I would like to add a little since I am usually on the other side of the lending desk. If your plan to use the equity of your free and clear house to purchase multiple houses is imminent and your commercial lender will do it, it is usually much cleaner and easier to go ahead and get a cash out term loan on the free and clear property prior to purchasing your other houses. Then you would have 80k in the bank to "play with." At that point you won't have to worry about release prices as each deal will be separate. Once you tie up your free and clear house as CC on one purchase, you will find it difficult to convince the lender to continue tapping into that house's equity for the next deals because they already have your collateral tied up and would, in a sense, worsen their collateral position with each deal they do. If you do go the CC route, make sure you negotiate the release price up front because all the boiler plate documents that lenders use would be in their favor and each house would carry a release price of the full loan balance upon sell or refinance.