When and How to Use a Blanket Real Estate Mortgage
In certain situations, blanket real estate mortgages can be a viable financing tool. When the right conditions are present, and the buyers and sellers all understand their options, lenders can make beneficial blanket mortgage loans. Learn the criteria and the pros and cons.
Lenders have one overriding interest in mortgage lending. They want as much protection as possible. They want collateral against which they can move if the borrower defaults. Blanket mortgages offer active investors options and leverage they may not otherwise be able to tap.
The reasons for choosing a blanket mortgage are very specific. Lenders can be enticed to offer better terms and interest rates, and sellers can move properties while holding paper with more security. Learn the specific criteria that would make a blanket real estate mortgage a good choice.
Even the regular first time home buyer is using leverage. They are using other people's money in the form of a mortgage to purchase their home. Of course, they don't think of it in the investor's terminology; they just need a loan to buy their home.
The new or small investor who buys one or a few rental homes is also often using traditional mortgage funding, a loan for each and they must qualify for each of them individually. It can get difficult when lending is tight because the requirements to qualify get tougher. If the rent and positive cash flow will be considered, that loosens it up a bit, but the credit-worthiness of the borrower and the down payments are more important.
When it comes to multi-family, apartments and commercial lending, things change quite a bit. The income from the property plays a much larger roll. The credit-worthiness of the borrowers, usually a group, is of less importance. The lenders use various qualifying calculations, including a break-even analysis.
The break-even analysis looks at all expenses to own and operate the property and then looks at the rents. Allowances are made for vacancy and credit losses, and then they look to see if there is enough monthly income left to provide a cushion and an acceptable profit for the owner/borrowers.
Risks of Leverage
When the real estate and mortgage markets crashed starting in 2006, many fix & flip and wholesale investors went under because they were caught with too much inventory that hadn't yet sold and the market prices plummeted, leaving them unable to pay the debt.
However, the majority of rental property investors were OK, as they had fixed mortgages and they weren't losing tenants. In fact, rental demand began to grow as people lost their homes, and others were afraid to buy into the falling market. Sure, their properties lost value, but it would be temporary, and they were only interested short term in cash flow; and that kept coming.
That doesn't mean all of the rental property investors got off the hook. Because the markets had been so hot and prices rising so quickly, some rental investors had purchased and placed into service more properties than they should have with small cash flows. They were doing OK until tenants moved out and their vacancy and credit losses took them down.
The point is that all investing carries risk. Real estate is usually less risky than the stock market, but only if the investor did their due diligence and didn't use excess leverage. When things are going well, don't start piling on deals just because you can, as you may regret it later. Rents can fall, especially if a local large employer leaves the area.