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Real Estate Buying on current equity..

Discussion in 'Real Estate Investing' started by Walley, Oct 8, 2007.

  1. Walley
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    Walley New Contributor Read Millionaire Fastlane

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    If I had a home with $40k in equity and use it to put 10% down on 4 $100k houses, wouldn't I run into some debt to income ratio? Why would the bank continue to loan me the money? I'm just unclear how that works. Thanks.
     
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  2. Adam
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    Adam New Contributor

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    You are right, in this situation the bank would probably not lend you money. Leveraging equity occasionally happens in the residential market, but is more common in commercial lending.

    For example:

    You own a $5M dollar income producing property.

    You owe $2M on that property. 40% LTV

    You then do one of 2 things:

    1. Open up an equity line to 70-75% total LTV - $1.5-1.75M to use as a down payment on other properties. The lender calculates the debt service (or ability to repay) off of the income on the subject property, not the property that the line is being used to purchase.

    2. Many banks will allow you to leverage that equity to purchase the new property. So, you are esentially getting 100% financing on the new property, but adding your existing property (the above mentioned $5M property) to the collateral pool to secure the lenders interests.

    When the bank is underwriting the transaction, the properties would have to be able to cash-flow on their own, the owner may have to meet net-worth and liquity requirements, and the equity position would have to be favorable to the bank. This type of structure is typically only available to seasoned property owners.
     
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  3. Yankees338
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    Yankees338 Bronze Contributor

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    Great explanation. Thanks.
     
  4. venom
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    venom New Contributor

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    Depends on what your debt to income would be.
    If your buying a 4 plex or 4 houses the story would be the same.
    When you own properties you fill out a schedule of real estate owned.
    They want to see equity in those properties but my understanding is they are focusing on the rents being 1.25% of the mortgage payments.
    They figure that 25% is lost to expenses.
    So your debt to income is based on more than just YOUR income.
    Which is a good thing !
    They also like to see that you have some money in the bank. So that you can weather a storm.
    I think with all the bank troubles they are getting tougher. Yet I still get things about refinancing or equity lines daily .
    Rob
     
    yveskleinsky likes this.

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