3 Kinds Of Real Estate Collateral

Performance Property Real Estate Question

Q: I’m trying to pull some money out of one of the properties I own. Do I have to provide collateral to get the money? Sam, Kenilworth, NJ

A: Let’s start by defining what collateral is. Collateral is something of value used as a pledge by a borrower as a guarantee to repay a loan.

3 Types of Collateral:

  1. Mortgage note
  2. Assignment of Rent
  3. Personal guarantees

Mortgage Notes:

In the event of a default, the property the mortgage note is associated with can be liquidated to offset the lender’s loss.

Assignment of Rents:

Assignment of rents is an arrangement that guarantees a lender or investor the rights to income generated through the lease or rental of the associated property if the borrower ever defaults on the loan.

Assignment of rents collateral is more often used in commercial real estate than in residential but it can be used in either case.

Personal Guarantee:

The 3rd type of real estate collateral we’ll discuss is a personal guarantee. A personal guarantee is a legally binding promise to repay a loan and is typically only available for borrowers who have the ability to use their credit to take out a loan without having to put down physical collateral because the lender does not fear they won’t pay. Normally, borrowers who are able to use a personal guarantee as collateral have personal wealth or access to other forms of collateral to back the loan.

To answer your question, if you can get someone to lend you money without putting up any collateral, do it! Normally, however, most lenders will require collateral for any sizable loan.

Thanks for your question, Sam.

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