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Buying investment properties can be an exciting endeavor for real estate investors However, financing multiple properties through individual mortgages can be time-consuming and costly That’s where blanket loans come in. As a real estate investor myself, I’ve used blanket loans to finance small multi-family purchases and appreciate their advantages. In this article, I’ll explain what a blanket loan is, who can benefit from using one, and the main pros and cons to weigh when considering this unique financing option.
What is a Blanket Loan in Real Estate?
A blanket loan, also called a blanket mortgage, is a single mortgage loan used to finance more than one investment property simultaneously The multiple properties serve as collateral for the blanket loan
The key advantage of a blanket loan is that it allows real estate investors to streamline the financing process when buying multiple investment properties. Rather than applying for and closing on individual mortgages, the investor can acquire financing for the entire portfolio of properties through one blanket loan.
Who Uses Blanket Loans in Real Estate?
Blanket loans are commonly used by real estate investors, developers, and landlords who purchase multiple investment properties at once. For example:
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Real estate investment firms or developers may use a blanket loan to buy several parcels of land for a large development project.
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House flippers might utilize a blanket loan to finance the purchase and renovation of multiple fixer-upper homes within a short timeframe.
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Landlords may take out a blanket loan to acquire a group of rental properties to add to their investment portfolio.
Blanket loans are less common among ordinary homeowners or first-time real estate investors. The loan requirements tend to be stricter, so blanket loans make more sense for experienced, sophisticated real estate investors.
The Pros of Using a Blanket Loan
As an investor who has used blanket loans myself, I’ve found several advantages to this financing method:
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Lower closing costs: With a blanket loan, you only have to pay closing costs and fees for one mortgage instead of for multiple individual loans. This can add up to significant savings.
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Simplified process: Applying for and managing just one blanket loan is much easier than handling the paperwork for multiple mortgages. There’s just one application, interest rate, monthly payment, and escrow account to keep track of.
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Flexibility: Blanket loans allow you to sell off or refinance one property without impacting the overall loan. You just pay back the portion of the loan secured by that property.
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Faster access to capital: Rather than waiting to qualify for each mortgage separately, a blanket loan provides faster access to the financing needed to fund multiple deals.
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Potentially better loan terms: Lenders may offer better interest rates or loan terms for a blanket loan compared to multiple small individual mortgages.
The Potential Cons of Blanket Loans
Despite the advantages, there are also some drawbacks to weigh:
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Higher down payment: Blanket loans often require a down payment of 25-50% of the total purchase price. This is higher than what’s typical for a single mortgage.
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Higher closing costs: Even though you only pay closing costs once, the total fees are likely higher for a blanket loan than for individual mortgages.
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Lower per-property financing: The total amount financed may be lower compared to getting a separate mortgage for each property based on its individual value.
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Cross-collateralization risks: If you default, you could lose all the properties securing the blanket loan rather than just one.
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Limited availability: Not all lenders offer blanket loans. The eligibility requirements tend to be more stringent as well.
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Balloon payments: Blanket loans may involve balloon payments requiring a large lump-sum payoff after a certain period.
Tips for Getting a Blanket Loan
If you decide a blanket loan is right for your real estate investment strategy, here are a few tips:
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Seek out commercial lenders or mortgage brokers specializing in this type of financing. Many standard banks and credit unions don’t offer blanket loans.
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Be prepared to provide extensive documentation on your finances, credit, and business track record as a real estate investor.
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Have complete details ready on all the properties – fair market values, rents, operating expenses, renovation plans, etc.
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Shop around and compare interest rates and terms. Don’t just go with the first blanket loan offer you receive.
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Hire a knowledgeable real estate attorney to review the mortgage documents and protections before signing.
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Try to negotiate favorable terms like lower origination fees, a lower down payment, or a longer period before any balloon payment.
The Bottom Line
While blanket loans aren’t right for everyone, they can be an efficient financing vehicle for experienced real estate investors. As with any major financial decision, you need to carefully weigh the pros and cons. For investors acquiring multiple properties simultaneously, blanket loans can optimize the lending process. But you want to make sure the repayment terms and risks fit your investment objectives and risk tolerance.
Cons of a blanket mortgage
- More expensive closing costs: While you only have to pay closing costs once, a blanket mortgage’s closing costs are often higher than a single mortgage’s closing costs.
- Higher down payment: Blanket mortgages can require a down payment as high as 50 percent of the combined purchase price of the properties.
- Balloon payments: Blanket mortgages are often structured so the borrower makes lower payments (sometimes interest-only payments) for a period of time, followed by a larger lump-sum payoff. This large payment could be difficult if you don’t plan ahead for it.
- Foreclosure risk: With multiple properties used as collateral, you risk losing them all if you default on the loan.
Pros and cons of a blanket mortgage
- Lower closing costs: You might see some savings with a blanket mortgage because you won’t have to pay separate closing costs and fees for each loan.
- Greater cash flow: You could reinvest the money you save on closing costs back into your portfolio to acquire more properties or launch additional projects.
- Easier administration: One loan means one interest rate, one monthly payment and one escrow account, cutting down on paperwork.
- Continuity: With a blanket mortgage, you don’t have to pay off the entire loan if you sell off just one property. (You do, however, have to pay back the portion of the loan that was securing that property — you can’t just pocket the proceeds from the sale.)
Blanket Mortgages | Real Estate Exam Prep
FAQ
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