By: Mario Navarrete, Relationship Manager
The 11th Loan Dilemma
Michael, a broker who I worked with many years ago, asked if I would like to meet him up for drinks to discuss a client who has a portfolio of residential rental properties. “Of course!” I said. We met up at a local pub and he started talking about his client’s portfolio and investment goals. After a brief chat about the scenario and intention to expand the portfolio, Michael poses the question vexing him, “How can I get my client their 11th Fannie loan on the next rental property?” At first, I thought he was pulling my leg. He’s been in the business longer than my 16-year tenure, and he should know exactly how to do this.
I chuckled a bit and responded with something to the effect of “What’s in that drink you got there, buddy?” Then, as I looked for a response, I noticed that he was indeed serious and awaiting my answer. To not risk offending him any further, I quickly explained the benefits that an investor like his client can have by obtaining a commercially structured loan on residential real estate.
The bigger picture of this interaction shed a bit of light on a much greater need within my sphere of influence – and that is the need to educate and bring us ‘old timers’ in the business up to speed. Many of us may not be aware of the types of loan products that are now available to residential real estate investors such as Michael’s client. I spent the next 90 days reaching out to all of my old contacts to see how many of them knew of these products. Sure enough, less than 10% of brokers knew about the abundance of investment financing options that exist for residential real estate investors (hence, the impetus for this blog).
Commercially Structured Loans on Residential Property
For simplicity, the “commercially structured” loan that I described to Michael is a business purpose loan on a portfolio of residential investment property. It takes five or more non-owner-occupied residential real estate properties and cross-collateralizes them into one investment loan. Frequently, you can hear them referred to as Rental Portfolio Loans or Blanket Mortgages. Either way, the idea is that by limiting the loan to investment properties with 5 or more units, the loan product itself can be categorized as a commercial loan despite its underlying collateral being residential. Investors can include multifamily properties in these loans as well.
To provide more clarity on what qualifies for the “5-unit” minimum, all of the following can be examples:
- 3 condos and 1 duplex
- 1 single-family rental and 1 quadplex
- 5 single-family rentals
- 1 5-unit apartment
- 1 duplex and 1 triplex
Understanding the Benefits of Blanket Mortgages
So, how do blanket mortgages help investors get their 11thFannie loan? (GSEs such as Fannie and Freddie often set loan limits based on a borrower’s income and number of properties owned, typically no more than 10.) To reset this limit, blanket mortgages wrap all of an investor’s residential assets into one commercial loan that will be held in an LLC vs. 10 or more different residential loans – thereby wiping the 10-count from their personal credit report and setting it back to zero. This enables investors to obtain additional loans from Fannie or Freddie. (Interestingly enough, Freddie now offers a single-family rental portfolio loan based on a pilot program that CoreVest participated in and helped launched. Rumor has it, Fannie themselves may be launching one shortly to compete.)
Nonetheless, some folks who don’t understand these mortgages may go to the only thing they know, which is rate.
Splendid! Let’s talk rates. If you have 10 Fannie mortgages right now, they are probably averaging a 4 handle, which are arguably great rates. However, since you can’t get an 11th like this, investors have to resort to more conventional investment type of loans and for those products, one can reasonably expect to pay 7% interest plus. In juxtaposition, if you take those 4 handles and wrap them up into a blanket loan, most blanket loans price in the 5’s today.
Additionally, if you qualify for the Freddie single-family blanket mortgage that CoreVest offers, those start in the high 4’s. Therefore, I pose this question to the reader: Would you rather have 10 Fannie loans and start accumulating 7% rates on your 11th property and beyond or would you rather have a blanket mortgage in the 5’s so you can go get 10 more Fannie loans in the 4’s?
Making Sense of It All
From a rate perspective, obviously the blanket mortgage option makes a tremendous amount of sense and that’s why we see so many investors at this juncture obtain one. However, there are many things for you to understand about rental portfolio loans. You will hear terms like Yield Maintenance, Capex Accounts, Expense Deposits, Delaware SPE LLCs, etc. Don’t be afraid – you can get educated – and we’re here to help. As most things you will find in life, these items make a lot of sense when you know what they are and why they are in place. We can clarify it and simplify it for you down the road.
To summarize, whether you’re a broker or an investor reading this, there are many benefits to a commercially structured loan for a residential real estate investment portfolio and many investors are catching on. To put it in a different light, there are compelling reasons why Freddie Mac has entered this space and Fannie is said to be closing in behind them. You can read more about this here.
If you have questions about the loan products, the terminology and nuances, or the steps to get your blanket mortgage, feel free to reach out to one of our representatives or myself directly and we’d be happy to walk you through the process.
Here’s to you and your investment future!
Are you looking to explore your financing options? CoreVest is the leading lender to residential real estate investors. We provide attractive long-term debt products for stabilized rental portfolios as well as credit lines for new acquisitions. For more information about how CoreVest can help you grow your rental and rehab business, please call Mario Navarrete at 949.936.0007 or email firstname.lastname@example.org