If you want to take your successful property investment business to the next level by buying multiple properties at once to develop them, a block loan (or block mortgage) may be your best option. A block loan combines separate mortgages for different properties into one loan. This type of loan simplifies the process and monthly payment system for real estate investors looking to grow their portfolio.
In this article, we’ll explain what general loans are, how they work, and the pros and cons of using them to build your real estate portfolio.
What is a global loan?
A global loan consists of two or more mortgages combined into one mortgage. It streamlines the lending process for property developers buying multiple properties at once or consolidating multiple loans into one. Blanket mortgages often don’t hinder your ability to sell your properties individually either. So you may be able to sell one property on the block loan and keep the others on the same mortgage. This may vary depending on the terms of the loan, so make sure you understand the terms before signing.
Another unique aspect of general lending is how collateral risk works. Each property on the loan acts as collateral for the others. So if you stop making payments on one of the properties, the rest are at risk of being seized.
What are lump sum loans used for?
General mortgages are most often used to purchase commercial or residential properties as a whole, or to purchase separate plots of land for development. For example, you can buy multiple properties from different sellers on a block loan and then sell the individual lots to new owners. House swimmers also use these mortgages to secure multiple properties at once.
However, you cannot use a block loan to purchase primary residences, vacation homes, or your first investment properties. To be eligible, you will need to have a large real estate portfolio to your credit.
How does a global loan work?
As with any commercial real estate loan, getting a block loan works much like the process of buying a house with just one property. Before you receive a home loan, you must go through the underwriting process. This process examines your business finances (i.e. cash flow), in addition to performing a title search and appraisal of each property.
Once approved, you will receive a loan with a single interest rate that covers each property. Keep in mind that this interest rate is usually higher than a standard mortgage rate and you will pay interest on the full loan amount.
If your global loan includes a partial release clause, you can sell individual properties without having to refinance (note: refinancing a global loan should always be an option if necessary). Also, you must cover any lost collateral when you sell any of the properties. Instead of depositing all proceeds from a sale into your checking account, you will need to repay the portion of the collateral covered by the property you sold.
Pro tip: When comparing general loans, look at interest rates, mortgage payment terms and fees, including whether or not it will cost extra to prepay the loan.
What does a global loan cover?
A comprehensive loan covers two or more mortgage properties at once. The most common use for general loans is for commercial properties, like office buildings, but you can also use them for residential real estate, like apartment complexes, multi-family units, or rental properties.
These loans can also cover purchases of land, whether developed or not. If you plan to develop the land and need financing in addition to your mortgage, a business construction loan could help cover the costs.
Advantages and disadvantages of a global mortgage
Here we highlight the main advantages of general loans, as well as some things to consider before using a general loan to buy real estate.
- Can save time. Instead of going through the long process of getting a mortgage for each property you buy, you only need to sign on the dotted line(s) for just one loan. This can save you time when getting the mortgage and monthly payments.
- Can save on closing costs. Instead of paying on each individual mortgage, you’ll pay many closing costs on a single loan. Borrowers looking to fund multiple mortgages at once can save money by using a block loan.
- Possible lump sum payment structure. With lump sum payments, you pay less at the start of the loan and more later. This structure can make upfront costs more manageable for some use cases, like house flipping. But it is only available to less risky borrowers, or those with the best credit scores and a large amount of assets.
- Higher down payment and interest rate. With a block loan, you may have to offer up to 25% to 50% down payment. This amount of financing can be an obstacle for some real estate developers. You might also encounter a higher interest rate of between 4% and 11%, depending on your risk as a borrower.
- Biggest risk. Like all mortgages, the property you buy becomes collateral to secure the loan. With a block loan, however, there are several at stake. So if you can’t make payments on just one, they can all be seized by the mortgage lender.
- May be limited by geography. Depending on the lender, you might be expected to buy properties in the same region of the country. This limitation may not work for your business if you want to open multiple office buildings in different regions.
How to qualify and apply for a global loan
To qualify for a block loan, you must already have a substantial real estate portfolio, as well as plenty of cash up front. A block loan is not the best option for a new real estate investor, as they usually won’t be able to afford the higher down payment and fees.
General mortgage lenders can be harder to find than others. Some major banks and online lenders offer them, but you’ll likely have the most success with commercial lenders offering business loans. If a global loan isn’t right for you, there are plenty of alternatives that can help meet your business needs. Use Nav to instantly compare your best options.
Rate this article