Cross Collateral/ Pledge Equity/ Refi - Lions, Tigers, and Bears Oh my

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Cross Collateral/ Pledge Equity/ Refi - Lions, Tigers, and Bears Oh my

Jairus King
Professional · Fredericksburg, VA · Member since 2015 · 37 posts · 8 votes

Good morning BP Family,

I have been blessed enough to have a property paid off and a few others with considerable equity. However I am looking at the net worth on paper and would much rather see that in my pocket or being exercised to get me to the next level. I have been considering the options and speaking with lenders and was hoping to hear from seasoned folks with 10+ houses that could provide insight on how to get to the next level.  

MY THOUGHTS

I was looking into cross collateral funding. My local bank said no thank you, but  private lender said possible. Essentially how this would work is that they would take the paid off property and finance a new property and then provide a few chips for me at the end of closing. However this is short term funding and I would have to refi- in 12 months. I would also have one loan to pay but two properties in debt. My thought was why would this situation be better than a straight refi to the paid off property and utilize those funds to go after another property? Can anyone share why this strategy may be useful? 

Pledge Equity- This is the sandwich that I was kinda after, but of course have not found yet. The ability purchase a property and pledge the equity in my paid off asset as down payment should I default. Essentially not having to come out of pocket on a new acquisition. Is there anyone out here that plays this game or am I unicorn thinking about possibilities?

I also looked into other means of HELOC and saw that many CC companies are now offering lines. I'm not sure this benefits me as there will need to be a means to pay back that money.... Perhaps after the new acquisition you refi to get the down payment back?

Anyhow was just looking for thoughts on these strategies and how some have continued to get into the 20+ club. Thank you for the time and any input that could add to my thought process.

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  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    3y

    Hello @Jairus King

    I haven't heard of pledge equity...debt needs to be secured against the free and clear property, whether pledge equity, cross collateralization, a refinance, a HELOC. You need to decide how to best use that debt. I like the idea of a line of credit, because I can draw and repay, draw and repay.

    We used the debt snowball to pay off our houses rather quickly, and then we used DSCR mortgages to pull out money from the portfolio. In my way of thinking today, the HELOC is a quick, easy and cheap way to get equity out of properties. A regular refinance is going to start getting messy when you have too many houses, and the reserve requirements were so onerous...the pot would get so big that I thought, why wouldn't I just go buy another house using seller financing with that pot of money? I'd fill up the pot again, and go buy with seller financing again. I'm done with conventional mortgages.

    I can go buy a house, secured by the equity in Property One. Then use all rents to pay down that HELOC aggressively. And do that again, only you now have one more houses' rent to add to the snowball.

    If you go with DSCR mortgages, which is a useful product in its own way, you have appraisals, closing costs, origination fees and a long prepayment penalty period. We do have DSCR mortgages right now, which prevents us from using the debt snowball unless we wait 5 years, or take the hit on the prepayment penalty.

    That brings me back to the HELOC. They are harder to get on investment properties. I do have a long list in my profile of lenders who have done them in the past, largely derived from people on BP who posted they have used them. Small local community banks and credit unions are often best, but I got a new lender this week who tells me they will do a HELOC on a rental, with a 680 FICO.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    3y
    Quote from @Jairus King:

    Good morning BP Family,

    I have been blessed enough to have a property paid off and a few others with considerable equity. However I am looking at the net worth on paper and would much rather see that in my pocket or being exercised to get me to the next level. I have been considering the options and speaking with lenders and was hoping to hear from seasoned folks with 10+ houses that could provide insight on how to get to the next level.  

    MY THOUGHTS

    I was looking into cross collateral funding. My local bank said no thank you, but  private lender said possible. Essentially how this would work is that they would take the paid off property and finance a new property and then provide a few chips for me at the end of closing. However this is short term funding and I would have to refi- in 12 months. I would also have one loan to pay but two properties in debt. My thought was why would this situation be better than a straight refi to the paid off property and utilize those funds to go after another property? Can anyone share why this strategy may be useful? 

    Pledge Equity- This is the sandwich that I was kinda after, but of course have not found yet. The ability purchase a property and pledge the equity in my paid off asset as down payment should I default. Essentially not having to come out of pocket on a new acquisition. Is there anyone out here that plays this game or am I unicorn thinking about possibilities?

    I also looked into other means of HELOC and saw that many CC companies are now offering lines. I'm not sure this benefits me as there will need to be a means to pay back that money.... Perhaps after the new acquisition you refi to get the down payment back?

    Anyhow was just looking for thoughts on these strategies and how some have continued to get into the 20+ club. Thank you for the time and any input that could add to my thought process.


     When the properties are paid off, private lending is typically not the solution because it can be very costly. If you can get convention financing that is always the best route. Where we see people get private lending is they have the proeprty under agreement and looking to close in 2 weeks and realize they cannot get financing, so they will get a 12 month loan so they can buy the property, use collateral of the other assets as well and then take their sweet old time to refinance. 

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