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I own a duplex and a business I am a part of wants to purchase more property. In order for the business I am involved in to get the loan needed I was given the option to put up my duplex as collateral. The duplex is currently rented out for $1500 a month. If I was to put the duplex up as collateral on the much larger loan then of course I will be experiencing a opportunity cost as the duplex cannot be sold during the time it has been collateralized. However, I will continue to rent out the duplex and collect the rent (just as I was already doing). I actually had no prior plans on selling the duplex. Is there a formula I can use to determine how much the company which is using my duplex as collateral to get a loan should possibly pay me or owe me to use this as their collateral?

note: The duplex is worth about $80,000, rents at $1500. Even though I wasn't planning on selling the unit in the meantime, you never know what may have came up, etc. I am still in school so I may be missing a very basic concept, please let me know if there is a name/term of what I am trying to do. Any ideas on ways I can approach this are greatly appreciated.

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  • Is mixing your personal finances and the business finances a good idea? Commented Feb 19, 2015 at 23:34
  • Well the duplex is a business as well (a hobby of sorts but under a business name). I understand the risks involved in this. The business I am a partner of is gaining my experience and use of the duplex as collateral.
    – Jeff82
    Commented Feb 20, 2015 at 0:55

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You're not missing any concepts! It sounds like you are contributing a piece of collateral to the business, and you want to know a fair way to value how much this contribution of collateral is worth.

Technically the economic answer would be the difference in interest between a secured loan and an unsecured loan.

So for example suppose that the business could get a loan at 17% without the collateral (maybe just on a credit card) but with the duplex as collateral it is able to get the loan at 10.5%.

In principle, the value of this collateral is (17% - 10.5%) or 6.5%, because it has allowed the business to pay 6.5% less interest on its loan.

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