For real estate investors, juggling multiple property deals and loans can get complicated.
Blanket loans often help simplify matters. Borrowers take out a single loan to cover multiple properties.
Even so, blanket loans come with their own quirks and have their pros and cons. Before entering into a blanket loan as an investor, make sure you understand exactly what you’re getting yourself into.
What Is a Blanket Loan?
A blanket loan is simply one loan that attaches to several real estate investment properties.
For example, if you buy a portfolio of five properties, a blanket loan allows you to take out one mortgage that covers all five buildings. The lender attaches a lien against each property, so if you default on your loan, the lender can foreclose on all five properties to recover their money.
Lenders do typically include a release clause, allowing the borrower to sell individual properties held as collateral as part of a blanket loan. However, they require the borrower to either repay a portion of the loan at the time of sale or put the money toward another investment. The lender then attaches a lien to the new investment property as a replacement for the sold collateral property.
That keeps their collateral — your remaining properties secured by the blanket loan — sufficient to cover their loan risk.
Who Takes Out Blanket Loans?
Blanket mortgages are exclusively for real estate investors and developers, not homeowners.
Investors can use blanket loans in many ways to invest in real estate. Landlords can take out a blanket mortgage to buy a portfolio of turnkey rental properties, as outlined above. Flippers could do likewise, to buy several fixer-uppers to renovate and flip, all with one loan. As they sell off properties, they typically repay a proportion of their loan.
Real estate developers use blanket loans to buy large swaths of land that they plan to subdivide into many units. As they build and sell off those units, they can either repay portions of the loan or put the money toward adding more properties to the portfolio.
Businesses with multiple locations and commercial properties can also use blanket loans. That could mean refinancing multiple existing loans into one blanket loan, or using a blanket loan to buy several new locations in one sweep.
When You Should Use a Blanket Mortgage
As touched on above, you can either use a blanket loan at the time of purchase or you can refinance to consolidate multiple mortgages into one loan.
It makes sense to use a blanket loan at the time of purchase if you plan to buy multiple properties simultaneously. You may also be able to negotiate staggered funding if you buy multiple properties in rapid succession but not quite simultaneously.
Another possibility with blanket mortgages includes buying only one new property, but securing the loan against other properties you own for additional collateral. Real estate investors sometimes do this in lieu of making a down payment on the new property.
For example, say you own a property worth $100,000, but you only owe $50,000 on it. You want to buy another property for $100,000, and the lender demands a $20,000 down payment.
Rather than cough up the $20,000 in cash, you offer your existing property as additional collateral for the new mortgage loan. The lender agrees to fund the full $100,000 for you to buy your new property, but puts liens on both properties. They now hold the first (and only) lien against your new property, and they have a second lien against your old property.
Advantages of Blanket Loans
Blanket mortgages come with several upsides for real estate investors.
To begin with, they can save on lender fees and settlement costs by holding one combined closing rather than having to pay separately for several. Lenders charge flat fees in addition to points, and those flat fees add up quickly. Title companies also charge many flat fees for each closing. With blanket loans, borrowers can pay those flat fees once, rather than at each settlement.
Aside from saving money, combining financing for several properties into one loan can also keep your finances and cash flow simpler. Rather than keeping track of 20 mortgage payments and loans, you need only track one or two.
When buying new properties, blanket mortgages can potentially reduce or eliminate your down payment if you use equity from an existing property for a cross-collateralized loan. Consider it one more way to pull equity out of your properties — and one that doesn’t require a totally separate settlement with its attendant costs.
Larger loans often mean more negotiating room for you as the borrower as well. Lenders don’t need to charge as many points on a $1 million loan to make it worth their while, compared to five $200,000 loans. Similarly, borrowers can often negotiate lower interest rates as well.
Downsides of Blanket Loans
Blanket mortgages come with their share of risks and disadvantages.
To begin with, it can be hard to find lenders that offer these loans. Up to this point in your real estate investing career, you may have established relationships with two or three lenders — none of whom might offer blanket loans. That forces you to go out and build new relationships with lenders who do.
Expect more intensive scrutiny by the lender for these larger, more complex loans. Rather than using a garden variety underwriter, bank managers might underwrite these larger loans themselves. Lenders might ask more probing questions and require more extensive documentation and paperwork from you. They may require higher credit scores than their typical loan products.
Blanket loans often come with shorter loan terms than traditional mortgage loans. Rather than the 25- or 30-year loan terms you’re used to, lenders often limit blanket loans to 10 to 15 years. That could come in the form of a balloon payment, or the loan could be entirely amortized over those 10 to 15 years. In the case of short-term amortization, that means higher monthly payments.
Finally, blanket loans pool your risk for many properties into a single loan. If you default on that loan, you could lose all the properties secured by it to foreclosure, not just one. In contrast, if you hold separate loans for each property, in a crisis you could isolate your losses to one property as long as you can afford to make your other monthly payments.
Where You Can Borrow Blanket Loans
Conventional mortgage lenders don’t typically allow blanket loans. Commercial lenders, portfolio lenders — who keep loans on their own books rather than selling them — and hard money lenders often do allow them.
Make no mistake, these lenders usually charge more than your personal home mortgage lender. But they also allow far more flexibility, and as a real estate investor, that flexibility is often necessary.
Call up your local community banks to ask whether they offer blanket loans for real estate investors. You can also reach out to portfolio lenders such as Lending Home and Rental Home Financing to inquire about them. For commercial loans, make sure you choose a commercial lender, because even many portfolio lenders only handle residential (single-family and 2-4 unit multifamily) properties.
Word to the wise: start building these connections now, before you actually have a time-sensitive deal on the line. Real estate investors need to be able to move fast and close deals quickly, else they risk losing the deal entirely.
The average mom-and-pop property owner with a couple units on the side of their full-time job will probably never need to take out large blanket loans. But for real estate developers and full-time real estate investors, blanket loans can help them scale their investment portfolios faster and cheaper.
Start expanding your network of lenders now, before you have a hot deal at risk of falling through. Think in terms of building a financing toolkit of many different options for buying your next investment property — or portfolio of properties.