Working capital is critical for builders and fix and flip real estate investors. It’s used to buy building materials, pay contractors, obtain permits, and more. It also serves as a buffer for the many unexpected costs that pop up during a real estate project. So, how do you keep as much cash on hand as possible while flipping houses to maintain a diverse and robust portfolio? Cross collateralization.
Cross collateralization is a method used by lenders to leverage the equity in a property you own free and clear to secure another loan. So imagine it’s time to close on the next property but you’re short about $30,000. You know you have trapped equity in your free and clear investment property to leverage but what’s the best way to do so?
Traditionally you could take out a mortgage on your free and clear house. But now you have a monthly mortgage payment on top of the fees you paid to the bank to originate that mortgage. You have equity, yes but at a cost that could reach $5,000 or more for the mortgage.
Instead, cross collateralization reduces the amount of money you need to bring to the closing table which means more money in your pocket. There are no transaction fees, just the lien. So, if the collateral property is worth $100,000, you can apply up to 50% or $50,000 to reserves with Builders Trust Capital in most cases. Both properties are listed on the new mortgage for your investment. This ensures your lender that they will get their money back and allows you to continue to leverage your property without having to come up with the cash all at once. Use your trapped equity instantly without needing to take out a 30-year loan, cash-out refinance.
The benefits of a cross collateralized loan:
- Reduces cash at closing
- Eliminate upfront costs of a cash-out refinance
- Avoid a new monthly mortgage payment
- Help maintain higher levels of working capital
- Potentially qualify for a lower interest rate
Builders Trust Capital creates loan programs that are tailored to and structured to borrowers’ needs. Our team looks at your financial picture holistically and offers you a loan program customized to your specific requirements whether you’re an experienced or first-time real estate investor. Focused on speed, flexibility, and customer satisfaction. Ready to discuss your funding needs? Call us at 856-422-3232. Let’s get started working together.