How to Buy a New Building Using Equity You Already Have

Many property owners try to buy new property all the time. In most cases, this involves coming up with a hefty down payment. However, you can avoid having to organize hundreds of thousands of dollars in cash by buying a new building using equity in other properties you already have, a process called cross collateralization. The bank or lender would write a loan using both properties or a number of properties as collateral for the new property you’re buying. The lender then places a lien on all the properties being used as collateral, which includes the property you’re buying and the other properties you’re using as equity. Cross collateralization is uncommon, but it can be done.

To qualify for this type of loan, you need to have significant equity in your other properties. Lenders that do this generally will allow you to use the equity from the other properties and take out a loan that totals roughly 65% loan-to-value of all of the properties combined. In this case, all of the properties’ loans have to equal 65% or less of all of the properties total values. Additionally, the debt service coverage ratio (DSCR) needs to be in line with what the bank requires, which is generally 1.25. While this transaction may seem a little unorthodox, the rates in terms of interest for a scenario like this do not necessarily need to be exorbitant. In most cases, you may still be able to obtain a conventional rate. In order for this loan to be successful, the bank or lender would prefer to see that you have experience in owning and managing multiple properties, especially when they are close to one another. This is a useful strategy especially if you are looking to expand your portfolio.

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