There are a variety of tools and techniques that the savvy real estate investor has under their belt which allows them to adapt and adjust to a range of situations. From understanding how to use a financial calculator to simply knowing the most commonly used terms, experienced investors build a repertoire that is suitable for the specific area of real estate investing they choose to focus on. For the buy-and-hold investor looking to generate rental income, this skill set includes the blanket loan.
What is a Blanket Loan?
The name says it all. A blanket loan is a single loan collateralized by several individual properties. It differs from a traditional mortgage in several ways, not the least of which is that it is not paid off if one of the properties acting as collateral is sold. Of course, collateral requirements still need to be met in this case. A blanket loan provides the real estate investor with a great deal of flexibility in managing their portfolio. In addition, a blanket loan avoids the need to apply for multiple mortgages.
Blanket loans are typically used to finance residential rental properties and real estate developments such as subdivisions. The financial and collateral underwriting is similar to the traditional mortgage. Real estate lenders focus on the ability to pay, the willingness to pay, and the value of the collateral. Cash reserves, management experience and LTV ratios are all carefully evaluated. Cash flow is also tested under high vacancy scenarios.
Blanket loans are available as fixed 30-year fully amortized mortgages in some situations. The more common structure is a 30-year amortization schedule with a balloon payment in 5 or 10 years. This typical structure often meets the needs of the active real estate investor nicely, since even a buy-and-hold strategy involves some degree of turnover, particularity over a 10 year time horizon.
Why Should a Real Estate Investor Use a Blanket Loan?
There are a variety of reasons why smart real estate investors use blanket loans instead of traditional mortgages on each property. One reason near the top of the list is the administrative simplicity provided by a blanket loan. Simply put, it is one loan instead of four or five. The simplification, both in terms of monthly payments and annual tax filings, is significant. And, once the initial loan is in place, refinancing if interest rates fall is much easier.
Blanket loans also treat real estate as a portfolio. Equity in one property offsets a high LTV ratio on another property. This allows the borrower to access that equity without selling that individual piece of property. Rental income from a nicely performing property located in a desirable area also helps meet the loan requirements. A blanket loan views the real estate holdings in the same way the real estate investor views them.
This approach to underwriting is important when a real estate investor makes the step from part-time to full time. Traditional mortgages evaluate personal income and credit scores. Blanket loans are commercial loans, so the underwriting emphasis is on the property rather than the real estate investor’s personal financial situation. However, a good personal credit score is always a plus in applying for any type of loan.
Underwriting for a blanket loan requires documentation on each piece of property and may require the formation of a distinct legal entity to own the properties. There are other requirements of blanket loans that may cause the novice real estate investor to stick with traditional financing. Blanket loans may not be suitable for every real estate strategy. Like any other tool of the real estate investment trade, blanket loans are useful and even necessary in the right circumstances.