Cross- Collateralization and What You Should Know Cross-collateralization happens when multiple properties are used to guarantee one loan or multiple loans. An example of this would be if an individual owns one property and wishes to buy a second property without using their assets to do so. The financial institution issuing the new loan can hold both properties as security. Like Patrick, investors often have cross- collateralized loans and don’t even realize it. This is just one reason why it is essential that you carefully read all loan contracts before signing them! If you wish to avoid cross-collateralization and the risks and restrictions that come with these types of loans, take out individual loans for each new acquisition whenever possible.
Tips for New Investors Patrick acknowledges that many people, particularly middle-class Americans, are often hesitant to begin investing because they realize they don’t understand exactly how the market works. According to Patrick, real estate professionals are in an advantageous position “to take some of the underused underutilized equity within their current real estate holdings and then participate in a 1031 exchange.” His firm manages such transactions as part of a recessionary acquisitions fund. He also enjoys helping those who have significant savings in an IRA or 401(k) retirement account, teaching them what to look for when choosing their own investment advisor, noting that administrators of employer- funded 401(k) accounts aren’t going to share this information with people because it cuts into the fees they collect on participants’ funds. Patrick maintains that being involved and being able to self-direct portions of your savings into funds like his company’s is all about diversification. As he puts it, the difference between his firm’s approach and traditional retirement savings is, “We help busy professionals, successful individuals ... diversify out of where the employers would have them in their 401(k)s and IRAs ... and give an alternative to being the DIY investor.”
Potential Benefits Although cross- collateralization loans give the banks more power over the lender and the properties they are borrowing money against, some investors find these types of loans tempting because they do not require the investor to put up their own money to acquire another property. This approach does have its drawbacks though as it can limit the ability to invest freely when the investor is presented with future investment opportunities.
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