Are you interested in more ways to buy properties with no money down? How about limiting the number of loans that show up on your credit report? Using multiple properties to secure one loan has some huge benefits to real estate investors.
Yesterday Scott and I were discussing a new construction deal he is working on with a client. This client has a fantastic deal in Denver that should net him half a million dollars in profits. He has the land, he has his city approval, he even has his builder lined up to start. The problem is, he is low on cash reserves. He has been turned down by three lenders before his mortgage broker called us.
As we worked through the deal and the borrower’s ability to complete the project, we determined that if he can build it at budget and be out of our loan in 12 months, he will be successful. So pretty much as long as everything goes as planned, he will be fine. The problem is that real estate deals don’t always go to plan. That is why we always say to have contingency plans and reserves. My guess is that it will take longer to build than he believes it will and there is a decent chance he will go over his budget. I say decent as in 95 percent of investors I know go over their budgets–even the most experienced guys and gals in this business miss when they are planning the construction costs.
So, what can we do to help this client get the deal done so he can make his $500,000?
What Is Cross Collateralization?
Cross collateralization is simply using more than one property to secure the loan. Adding extra collateral allows the lender to increase the loan size which can help fund reserves, which is what is needed in this case, reduce down payments, or help overcome another obstacle like poor credit. Good hard money lenders are experienced in this area because it is a common practice. I recently closed a land development deal for a very good client where he did not want any down payment or interest payments. We are more conservative on land deals so the only way to increase our loan to cover both his down payment and his monthly payments was to add another single-family home as collateral. He purchased his land deal with nothing out of pocket and will go through the entitlement process with the city without worrying about monthly payments. We are comfortable with the deal because we have the land as collateral and his rental property. Travis used to always joke that you can’t buy a beer with equity. That is true, but you may be able to use it for your down payment or to meet a reserve requirement.
Multiple Properties Can Reduce Loans On Credit Report
Another advantage to using multiple properties is you can remove loans from your credit report. I have a loan with my local bank that is secured by three of my rentals. I allocate the interest on this loan to one of the three properties so when you look at my tax return, you see interest expense on one property. Since it is one loan, only one loan shows on my credit. This is advantageous because conventional lenders limit the number of financed properties you can have, so limiting the number of loans you have increases the number you can get.
Scott’s client does not own any other properties so even though we explored the option of cross collateralization, it is not viable. For this client, we are going to need to find another signer on the loan that has some additional liquidity, or we will be advising him to wholesale the deal for a much smaller but safer profit.