Using equity from three IP's as deposit for IP#4

I have 3 IP's with quite high LVR. Say I refinance all three of the IP's, and I can release ~ 20K equity from each IP.

example:
IP#1 : equity $20K
IP#2 : equity $20K
IP#3 : equity $20K

Am I able to use the combined funds (i,e $60K) as a deposit for IP # 4?

Is this strategy OK, or is it too messy?
 
I have 3 IP's with quite high LVR. Say I refinance all three of the IP's, and I can release ~ 20K equity from each IP.

example:
IP#1 : equity $20K
IP#2 : equity $20K
IP#3 : equity $20K

Am I able to use the combined funds (i,e $60K) as a deposit for IP # 4?

Is this strategy OK, or is it too messy?

Yes you can. A bit messy but your only alternative may be just wait for more to build up.

No need to refinance, just make sure you get a separate loan split on each. You could have one loan of $60k but this would involve cross collateralising the loans - 3 securities for one loan - which you should avoid.

I have assumed you mean useable equity too.
 
I have assumed you mean useable equity too.

Thanks Terry. Yep. I meant useable equity.

There is probably more than $20k useable equity in each of the three IP's.. I just used the $20K number as an example.

I agree. I will probably wait for more equity to build up.. I was just interested to know if this strategy is possible.

Has anyone on here used this strategy, or do you guys just wait until a lot of equity has built up in the IP, and then just use the equity from one IP as a deposit for your next IP ?
 
I had one loan client increasing loans by small portions such as $8k. She used the funds for deposits and has done well out of it now - but now you have to consider if prices will keep rising in the near future. Depends mainly on where the properties are I guess.
 
Has anyone on here used this strategy, or do you guys just wait until a lot of equity has built up in the IP, and then just use the equity from one IP as a deposit for your next IP ?

Depends how fast the market is moving as to how often we refinance.

If you do the above example with say $200k equity available from each, you can do things like make unconditional offers (assuming Building is ok) on a $600k property, because even is finance fell through, you'd have the $600k available to fall back on in a worst case situation.

The Y-man
 
I have 3 IP's with quite high LVR. Say I refinance all three of the IP's, and I can release ~ 20K equity from each IP.

example:
IP#1 : equity $20K
IP#2 : equity $20K
IP#3 : equity $20K

Am I able to use the combined funds (i,e $60K) as a deposit for IP # 4?

Is this strategy OK, or is it too messy?

Yes - we're doing this at the moment. (We needed to buy something for a short-term PPOR purpose as well, and we need to conserve cash at the moment for some forthcoming costs).

We're getting two loans - one secured against the new property at maximum (paying LMI) and one for the deposit and costs against equity in IP#1 and IP#2. This does mean cross-collateralisation, but it's such a small amount that if we ever sold IP#1 or IP#2, we would be able to pay out both the main mortgage and the little one, so it doesn't block any future sale of either property. Because it's such a small loan, we can pay it sooner if it becomes a thorn in our side anyway.

In summary:

IP#1 [Big loan - 75%] [Cross collateralised loan - 5%]
IP#2 [Big loan - 75%] [Cross collateralised loan - 5%]
IP#3 [Left out of it because we're planning to sell]
IP#4 [Big loan - 95%] [Residue paid from cross collateralised loan]

I never thought we would cross-collateralise, but it was the right fit for our situation, and we have an exit strategy, so...never say never.
 
Yes - we're doing this at the moment. (We needed to buy something for a short-term PPOR purpose as well, and we need to conserve cash at the moment for some forthcoming costs).

We're getting two loans - one secured against the new property at maximum (paying LMI) and one for the deposit and costs against equity in IP#1 and IP#2. This does mean cross-collateralisation, but it's such a small amount that if we ever sold IP#1 or IP#2, we would be able to pay out both the main mortgage and the little one, so it doesn't block any future sale of either property. Because it's such a small loan, we can pay it sooner if it becomes a thorn in our side anyway.

In summary:

IP#1 [Big loan - 75%] [Cross collateralised loan - 5%]
IP#2 [Big loan - 75%] [Cross collateralised loan - 5%]
IP#3 [Left out of it because we're planning to sell]
IP#4 [Big loan - 95%] [Residue paid from cross collateralised loan]

I never thought we would cross-collateralise, but it was the right fit for our situation, and we have an exit strategy, so...never say never.

What if you lose your job and need to sell a property? Why didn't you do it without crossing?
 
What if you lose your job and need to sell a property? Why didn't you do it without crossing?

Our portfolio is positive even with the new loans, so it is unlikely we would be forced to sell, including in case of job loss. If we did have to sell (for instance, permanent disability) the portfolio is sustainable enough that we could sell in a controlled way. It wouldn't be a fire sale. We aren't as close to the wire as a 100% borrowing might suggest - we actually have a fair bit in savings, but we also have some major overs and unders in the next six months that we need to manage.

And in any case, selling either IP#1 or IP#2 would realise enough to clear both the primary mortgage and the crossed loan. So the arrangement wouldn't block selling just one, or force the sale of both, which as far as I know are the only reasons people avoid crossing.

In other words:

IP#1 - value $320K - first mortgage $245K - crossed loan $18K.
IP#2 - value $290K - first mortgage $208K - same crossed loan $18K

The exit strategy is to sell IP#1 and clear first mortgage and entire crossed loan, leaves $57K and IP#2 released from the crossed loan. (Or the same in reverse for IP#2).

We didn't do it without crossing because we didn't want to incur LMI for such a small loan by putting it against one property only (we would have gone above 80%), and we couldn't do separate smaller loans because the bank has a minimum home loan of $10K.
 
Our portfolio is positive even with the new loans, so it is unlikely we would be forced to sell, including in case of job loss. If we did have to sell (for instance, permanent disability) the portfolio is sustainable enough that we could sell in a controlled way. It wouldn't be a fire sale. We aren't as close to the wire as a 100% borrowing might suggest - we actually have a fair bit in savings, but we also have some major overs and unders in the next six months that we need to manage.

And in any case, selling either IP#1 or IP#2 would realise enough to clear both the primary mortgage and the crossed loan. So the arrangement wouldn't block selling just one, or force the sale of both, which as far as I know are the only reasons people avoid crossing.

In other words:

IP#1 - value $320K - first mortgage $245K - crossed loan $18K.
IP#2 - value $290K - first mortgage $208K - same crossed loan $18K

The exit strategy is to sell IP#1 and clear first mortgage and entire crossed loan, leaves $57K and IP#2 released from the crossed loan. (Or the same in reverse for IP#2).

We didn't do it without crossing because we didn't want to incur LMI for such a small loan by putting it against one property only (we would have gone above 80%), and we couldn't do separate smaller loans because the bank has a minimum home loan of $10K.

It is not about being forced to sell. Did you realise if you stopped working and had to sell a property to get funds to live on perhaps, the lender will need to value the remaining properties and then you would need to maintain an adequate LVR on this property, which may entail paying down the loan. There is also a good chance that the lender will find out you are not working and insist on taking all the proceeds from the sale and using that to pay down the remaining loans - which may be the deductible investment loans instead of the non deductible. Hope your lender is not NAB!

But the amounts are small so I would try to uncross as soon as you can after settlement. 6 months of growth may be enough.
 
It is not about being forced to sell. Did you realise if you stopped working and had to sell a property to get funds to live on perhaps, the lender will need to value the remaining properties and then you would need to maintain an adequate LVR on this property, which may entail paying down the loan. There is also a good chance that the lender will find out you are not working and insist on taking all the proceeds from the sale and using that to pay down the remaining loans - which may be the deductible investment loans instead of the non deductible. Hope your lender is not NAB!

But the amounts are small so I would try to uncross as soon as you can after settlement. 6 months of growth may be enough.

Fair point. We're with CBA and they have been very supportive of us - we were both made redundant last year and were in fact both unemployed for a time. But we had a clear strategy to maintain our repayments that we could explain to them, I had other passive income streams and other liquid assets, and everything was always up to date, so we never had a problem. But I recognise that it could have gone another way.

The bottom line is, while we wouldn't necessarily like every turn this could take, we could tolerate any foreseeable outcome, including being forced to revalue or sell the lot. So that was good enough for us to live with it.

You're quite right, though, it isn't ideal. It's a short-term solution to a short-term problem and we expect to clear it within the year. I'd probably be less laid-back if I really thought this was how it would be structured for the longer term.
 
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