Buying property on a consistent basis can be difficult. Coming up with the down payment is probably the number one reason deals don’t get done. Unless you’re raising capital or partnering with others who have money, it can be a real struggle.
But what if you already own some property with equity? What if you find a great deal that can support itself being 100% financed? Well if you answered yes to these questions then I have your answer: cross-collateralization.
Have you ever wondered how some people constantly buy real estate by themselves? They never partner or raise money. Most of the time they’re not making enough cash flow per year to keep ponying up large sums of money for the down payment needed. What gives?
What many outsiders don’t realize is these buyers likely have equity in another property that can be used for that down payment. This is called lendable equity.
What Is Lendable Equity?
Lendable equity is simply the equity you have in another property that you can use to purchase other properties. By utilizing this method, you are cross-collateralizing one property to buy another.
Lendable equity is one of the best-kept secrets for doing no money down deals. I have personally used this method to buy millions of dollars’ worth of real estate without putting any of my own money down.
How To Calculate Lendable Equity
Here’s an example. Let’s say you buy a house for $50,000. You decide you’re going to BRRRR this deal, and you need to put $10,000 into the property. Your after-repair value (or ARV) is now $100,000.
So, you paid $50,000, plus you put in $10,000 worth of repairs. You’re all-in at $60,000. Now you have $40,000 worth of lendable equity, right?
Most banks will lend up to 80% of the appraised value of the home. That means the most you can get for a cash-out refinance on this property is $80,000. And that’s great for you! You just cashed out and made $20,000.
But what if you only took a loan out for your initial investment of $60,000 and left that other $20,000 on “the books”? Well, that $20K is called the lendable equity.
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