Wednesday, 25 July 2018 00:00

Everything You Need to Know About a Blanket Loan

investor blanket loanAre you an experienced real estate investor who wants to grow their portfolio by more than just a single property?

If so, you should know about one of the best lending solutions for that kind of venture.

With a blanket loan, you can secure numerous properties at once without the same inconvenience and overhead associated with multiple mortgages. Blanket loans offer a number of other unique advantages, as well.

 

What Is a Blanket Loan?

blanket loanWhen most people think about taking out a loan to purchase a property, they imagine a residential or commercial mortgage. This has been the standard for decades.

Yet, while this has become the most popular version for buying a property, investors often want to buy more than one at the same time. For example, many developers want to buy tracks of land all at once. Real estate investors often find multiple buildings for sale in the same area that they’d like to purchase at the same time.

In these situations, those parties could take out multiple mortgages – one for each property they wish to purchase – but, as many investors and developers have had to learn the hard way, that usually makes for a very cumbersome arrangement – to say nothing about how much money it wastes (more on that in a minute).

Instead, an experienced investor will almost always opt for a blanket loan. As the name suggests, a blanket loan covers multiple properties, allowing an investor to buy, hold, and sell each of them under the same financial agreement.

The investor also enjoys the convenience of making this arrangement through a single lender, instead of having to go through the process with many of them. This means they only need to concern themselves with one payment for one loan – ever.

These business-purpose loans almost always come from non-bank lenders. Generally, a blanket loan is used for buying between one and four properties. These can include:

 

  • Single Family Units
  • Townhomes
  • Condos
  • Multifamily units

 

However, they can be used to purchase many, many more.

 

Other important features of a blanket loan include:

Cross-Collateralization Across Properties – and State Lines

Another reason an experienced investor will usually choose a blanket loan is that it allows them to cross-collateralize properties – even across state lines. So, not only is the investor able to finance several properties through one lender, they can also use this arrangement to finance other deals, including those that might span across two or more states. Using multiple loans will never issue the same advantage.

 

A Blanket Loan Can Free Trapped Equity in Your Portfolio

loan equityNot so long ago, developers and investors alike depended on leveraging the equity they had in properties to finance further ventures. This was the cornerstone of most business plans in this industry.

Obviously, a lot has changed since then. One such change – which has become a major challenge – is that banks won’t let investors just extract their equity anymore, even when the value of a home has gone up significantly – enough so that this shouldn’t be an issue.

Unfortunately, this means the investor’s equity has essentially become “trapped” within the property, severely limiting their portfolio’s potential. As long as it remains stuck there, it’s virtually useless to the investor.

 

A Blanket Loan Can Leverage the Support of an LLC

Most serious real estate investors run a business entity. This gives them special considerations when applying for a blanket mortgage. Specifically, it means the non-bank lender will consider their LLC’s track record and creditworthiness when deciding how much to lend them.

While the investor’s personal financial history may play a role, as well, it’s usually very helpful to have the backing of an LLC during the consideration phase. This can lead to a much larger blanket loan than they would have otherwise received.

 

The Release Clause

The last trait of a blanket loan that we need to talk about is the release clause. This is an essential feature because, without it, these loans would lose a crucial degree of flexibility.

In short, the release clause of a blanket mortgage gives the investor the right to sell off individual properties it covers without selling all of them.

Traditional mortgages usually come with a “due-on-sale-clause.” It requires that whatever remains of the mortgage debt at the time the property is sold must be paid in full. The release clause in a blanket loan replaces this version, allowing developers and investors to make partial payments on their loan as separate properties are sold off.

For example, if you bought five duplexes with a blanket loan and later received a fantastic offer for only one of them, you could take it – selling off just that one property – without having to pay the balance of the loan back to your lender or go through the refinancing process with them.

 

8 Advantages of a Blanket Loan

Aside from the traits described above, there are a number of other reasons so many investors choose to use a blanket loan for their deals. Individually, most options don’t offer these advantages. However, only a blanket loan offers all of them.

 

Here are the eight main benefits of taking out a blanket loan.

1. There Is No Limit to the Number of Properties You Can Own

no limit portfolioIf you dream of developing a real estate empire, you’ll soon find that Fannie Mae and Freddie Mac can only offer so much help. Both FNMA and FHMC limit the number of properties they finance to just 10. Once you hit that limit, you’re on your own when it comes to financing. That’s not ideal.

Fortunately, there is absolutely no limit to the number of properties you can pay for using a blanket loan. There is also no limit to the number of properties you can own in order to be eligible to apply for one.

Again, while a conventional mortgage makes sense for people in the market for residential homes or a company looking for a place to do business, blanket loans are essentially designed for investors who want to own multiple properties.

2. Consolidating Your Properties into One Loan

Of course, that’s not the only reason a blanket loan works so well for investors with multiple properties. Even if it wasn’t one of the only sound options available, it would still be one of the most attractive simply because you can consolidate all of the properties you own under a single loan.

As we touched on earlier, instead of having to deal with multiple lenders, you deal with one. You have a single payment for that single loan. Yet, despite the fact that it feels like you’re paying a conventional mortgage, you have invested in multiple properties.

This isn’t just about convenience, though. With a blanket loan, you’re also reducing the costs involved by consolidating many properties under one arrangement.

Even if you received the exact same amount of money per property for a five-home deal, you’d still spend more on individual loans versus a blanket mortgage. That’s because the former comes with costs for each loan. You need to cover origination, application fees, points, and any other necessary expenditures.

Depending on the price of your properties, that could cause significant overhead for your deal. This is just as true if you’re looking to refinance, as well.

Again, a blanket loan gets treated like a single loan in this respect. You only deal with one origination, a single set of points, and just one application fee.

Keep in mind, too, that you can use a blanket mortgage to refinance your current holdings, as well. So, you can literally consolidate the loans you already have under a single financing arrangement. You could even use the additional properties to negotiate more favorable terms with a lender. After all, those properties provide the lender with better security. Better terms mean better cash flow, which makes this a very difficult advantage to ignore.

3. Streamlined Accounting with Just One LLC

If you think taking out multiple loans is going to be inconvenient, wait until you need to maintain the related bookkeeping year after year.

Again, the source of this shortcoming is the fact that, instead of a single blanket loan, you’re dealing with multiple loans – which means multiple lenders.

That’s a lot of details to juggle just to make sure you’re meeting your contractual obligations. Most investors would wince at the idea of having to manage those details for 10 or 20 properties. So, imagine scaling up to 50 or 60.

It would be nearly impossible to coordinate payments while also meeting unique lenders’ demands for dozens of different mortgages.

The alternative is 5 or 6 blanket loans with each one covering 10 mortgages. That is much more manageable.

4. Leverage the Equity from Many Properties

leverage equityEarlier, we mentioned how one of the biggest advantages of a blanket loan is that you’re not limited to a certain number of properties. You can basically own as many as you like without hurting your chances of securing further financing.

This turns into an even bigger advantage when you consider the purchasing power all that equity from those properties will give you. The next time you find a great property to invest in, you can pool the equity from your existing properties, cash it out, and use it as a down payment toward the purchase of this new rental home – or rental homes.

Many investors with blanket loans are glad they had them when one of their properties needed maintenance, repairs, or renovations, as well. Their blanket loans were extremely helpful when they required access to large sums of financing to protect the value of their investment.

So, in that sense, taking out a blanket loan is just as much about planning for future investments as it is about purchasing properties in the present.

5. Greater Borrowing Power

borrowing powerSimilarly, think about the borrowing power you enjoy by having a blanket loan. The next time you need to borrow money, you’ll be able to prove you’ve already been responsible with a large sum. That means you shouldn’t have much trouble securing even more.

This is a huge advantage far too many investors miss out on when they utilize individual loans for their properties.

The reality is that 5 loans worth a combined $600,000 is not the same as 1 loan worth the same amount – at least not in the eyes of a lender. The borrower who has proven themselves with the $600,000 loan will have a much easier time securing further financing – at a larger amount – than a borrower whose largest loan has only been for $100,000.

Once again, blanket loans are fantastic for buying yourself greater purchasing power in the future, a critical advantage for experienced investors looking to expand their portfolios.

6. Take Advantage of Your Strong Cash Flows

When a lender considers you for a blanket loan, they’ll conduct a global cash flow analysis on each of your properties using a Debt-Service Coverage Ratio (DSCR) assessment. This computation determines how well the properties’ potential for income will be able to cover the debt servicing involved.

This is how it’s calculated:

Net Operating Income / Debt Service = DSCR

If the DSCR is above one, the purchase of the property will cover its debt service and the loan will most likely be approved.

All of this works to your advantage when you bundle properties because those with stronger cash flow will help make up for those that are weaker. If you tried taking out individual loans, those weaker properties would probably come in at a DSCR below one and you most likely wouldn’t be approved for financing.

7. Reduced Risk

reduced risk investingEvery investment involves a certain amount of risk. However, given the money involved, real estate investors are usually especially concerned with mitigating their exposure as much as possible.

Although purchasing multiple properties may seem like it does the opposite, recall that a blanket loan involves the benefits of an LLC. Just one of these many benefits is that the LLC protects the investor against liability issues. These issues could otherwise put the investor’s personal finances at risk. Instead, the LLC would take the brunt of any legal recourse.

8. Protecting Your Personal Credit

Here’s another example of how using an LLC for building your real estate investments is so advantageous. The LLC is a separate entity. Its financials aren’t connected to yours. Therefore, the blanket loan has no effect on your personal credit.

Among other things, this means your credit utilization ratio remains untouched if you care to use it for other investments.

4 Common Misconceptions About Blanket Loans

By now, it’s probably clear why blanket loans have become so popular with serious real estate investors. They are perfect for financing the purchase of multiple properties and come with plenty of additional benefits, too.

However, there’s a good chance you may have heard of certain traits associated with blanket loans that just aren’t true.

 

Here are the four most common misconceptions about these loans:

1. You Can Add Properties to a Blanket Loan After Closing

Perhaps because blanket loans cover multiple properties, many people mistakenly believe that you can add properties to one of these loans after closing has occurred.

Without a doubt, that would be a very advantageous feature. However, blanket loans will definitely not allow you to modify a deal post-closing. You need to know which properties you intend to buy before moving forward with the loan.

2. Lower Closing Costs

For all the reasons we’ve already been over, blanket loans make a lot of sense for small-to-medium-sized investors. They make larger transactions much more affordable and can multiply their otherwise modest buying power.

That said, it’s a mistake to think that blanket loans come with lower closing costs. This just isn’t the case.

Blanket loans still involve many of the typical costs that come with buying real estate. These include:

 

  • Appraisals
  • Title
  • Insurance
  • Underwriting Fees

 

These costs are very similar to those associated with a single asset loan for an individual loan.

3. Not Able to Combine Different Property Types

There’s a persistent misconception that blanket loans can only be used for one type of property. For example, some people think that you couldn’t use one of these loans to cover a townhome, condominium, and 30-unit apartment.

While every lender gets to exercise their own discretion when it comes to the deals they’ll finance, there’s no law that says blanket loans can’t be used for different types of properties.

Therefore, if you already own five single-family residences, but you’d now like to add an apartment building to your portfolio, you could still consolidate your entire portfolio under one blanket loan.

4. Blanket Loans are Wraparound Mortgages

Finally, many investors think that blanket loans and wraparound mortgages are the same thing. They’re not.

When a lender takes out a wraparound mortgage, they assume responsibility for an additional mortgage, as well.

For example, say you’re interested in a property that costs $300,000, but you find out that it already has a loan on it for $100,000.

In that case, the lender may ask you to put forth $50,000 as a down payment. They will then issue a mortgage that “wraps around” the remaining $250,000 because they are also assuming responsibility for the initial mortgage.

While both loans involve multiple mortgages, blanket loans also involve multiple properties. That’s the difference. A wraparound mortgage is only ever for one.

 

Where to Obtain a Blanket Loan

One other potential disadvantage of a blanket mortgage is that it can be difficult to find a lender that offers them. As we mentioned earlier, your best bet for taking out a blanket loan tends to come from alternative lenders – not traditional banks.

That being said, in some cities, this isn’t the case and you’ll have no problem finding a local bank that will offer you a blanket loan. In fact, over time, they may be willing to offer you several.

However, to secure that initial blanket loan, you’ll need to provide them with:

 

  • Business tax returns for the last 2-3 years
  • Personal tax returns for the last 2-3 years
  • Financial statements
  • Cash flow records

 

Expect a fair amount of scrutiny before receiving a blanket loan, too, above and beyond the normal paperwork required for a single mortgage.

You’ll also need plenty of documentation on any other principals involved in the deal. The same goes for the business entity involved. Be prepared to answer a large number of questions about the deal itself, too.

In almost every case, the only blanket loan you’ll be offered will be for 20 to 25 years, as well.

Again, this is if you’re lucky enough to have a local lender that will even consider this option. By their very nature, blanket loans are specialized. They’re also quite large. Most lenders just don’t have experience issuing them and few are excited to venture into the unknown with so much money involved.

As you can see, even in that case, you’ll need to jump through a number of hoops before they feel comfortable proceeding with a blanket loan.

This is why, despite their many benefits, blanket loans are still relatively uncommon among real estate investors.

 

The Best Resource for Your Blanket Loan

At Rental Home Financing, we’ve set out to change that.

We believe that blanket loans are often the perfect solution for serious real estate investors who want to finance multiple properties at the same time.

Better still, we actually offer several blanket loan options, so there’s no need to sacrifice your vision in order to secure the terms you require.

Instead of looking at old-fashioned metrics like your personal income or debt-to-income ratios, our team strictly reviews what matters most: the actual real estate involved and the cash flow of your portfolio.

The long-term goal we have with all of our clients is to become their long-term financing partners. We want to help you increase your real estate portfolio as much as possible.

Ready to review our flexible financing options for your next real estate deal? Then check out our selection of blanket loans today.

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