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When can you use existing real estate as collateral to buy more?
It would be good to know which country you are in? You are basically on the right track with your last point. Usually when you buy your first property you need to come up with a deposit and then borrow the remainder to have enough to purchase the property. In most cases (and most places) the standard percentage of loan to deposit is 80% to 20%. This is expressed as the Loan to Value Ratio (LVR) which in this case would be 80%. (This being the amount of the loan to the value of the property). Some banks and lenders will lend you more than the 80% but this can usually come with extra costs (in Australia the banks charge an extra percentage when you borrow called Loan Mortgage Insurance (LMI) if you borrow over 80% and the LMI gets more expensive the higher LVR you borrow). Also this practice of lending more than 80% LVR has been tightened up since the GFC. So if you are borrowing 80% of the value of the property you will need to come up with the remainder 20% deposit plus the additional closing costs (taxes - in Australia we have to pay Stamp Duty, solicitor or conveyancing fees, loan application fees, building and pest inspection costs, etc.). If you then want to buy a second property you will need to come up with the same deposit and other closing costs again. Most people cannot afford to do this any time soon, especially since the a good majority of the money they used to save before is now going to pay the mortgage and upkeep of your first property (especially if you used to say live with your parents and now live in the property and not rent it out). So what a lot of people do who want to buy more properties is wait until the LVR of the property has dropped to say below 60%. This is achieved by the value of the property going up in value and the mortgage principle being reduced by your mortgage payments. Once you have enough, as you say, collateral or equity in the first property, then you can refinance your mortgage and use this equity in your existing property and the value of the new property you want to buy to basically borrow 100% of the value of the new property plus closing costs. As long as the LVR of the total borrowings versus the value of both properties remains at or below 80% this should be achievable. You can do this in two ways. Firstly you could refinance your first mortgage and borrow up to 80% LVR again and use this additional funds as your deposit and closing costs for the second property, for which you would then get a second mortgage. The second way is to refinance one mortgage over the two properties. The first method is preferred as your mortgages and properties are separated so if something does go wrong you don't have to sell everything up all at once. This process can be quite slow at the start, as you might have to wait a few years to build up equity in one property (especially if you live in it). But as you accumulate more and more properties it becomes easier and quicker to do as your equity will increase quicker with tenants paying a good portion of your costs if not all (if you are positively geared). Of course you do want to be careful if property prices fall (as this may drastically reduce your equity and increase your total LVR or the LVR on individual properties) and have a safety net. For example, I try to keep my LVR to 60% or below, currently they are below 50%.