Using existing property as collateral for a second investment property
Hi Terry, I currently own an investment property that I rent out. It's a house in a nice western suburb that I've had for about 10 years. It's FMV is $415,000 and I owe $167,000. I make about $500/ month cash flow on it. Now, I am looking to purchase a 2 flat house in the same area as a second investment property. The purchase price is $450,000. The total current rent for the 2 units is $2700. I also own a primary residence that is worth $1M and I owe $200,000 on (if that matters in terms of details). I have heard of the concept of using the equity in investment property 1 as collateral for investment property 2. I do have the cash for a 20% down payment on the second property if necessary but is it financially smarter to use the existing equity that I have built up?
Terry Says
What you are describing is called LEVERAGE. And it works as long as market values are going up. But if we have a recession, and if you can't find renters or have to evict someone, you probably won't have any equity in the first property to tide you over or help you refinance. Even worse, if you have to sell the property for any reason, you could be left owing the bank if you sell for more than the new, larger mortgage. I think rental property is great. But only if you can do it with a cash down payment that gets you the lowest rate and best terms. And only if that doesn't leave you cash poor -- because real estate is not always a "liquid" investment.
