How to evaluate cash out refi with a blanket loan

Question

I own a bunch of rentals free and clear, and I'm looking to free up some cash so I can buy a few more. I'm looking into blanket loans -- one loan for multiple properties. I figure this will save me some closing costs.

I'm a fairly conservative investor. I don't want to pull cash out of all of the properties in the portfolio just because I can -- I only want to pull cash out of a few of them. In my mind, there's no sense in pulling a bunch of cash out if I don't have an immediate use for it.

In this situation, is it better to run the numbers for each property individually, or for the entire portfolio combined?

When I analyze the properties included in the refi individually, the mortgage payments push some of them into negative cash flow. However, the cash on cash return of the portfolio as a whole increases.

I don't want to get into a situation where the cash-flowing properties are subsidizing the non-cash flowing properties. Some properties can handle 70% LTV and still cash flow. Others stop cash flowing if you pull out more than 20-30%.

What's the best way to look at this? Make decisions based on the portfolio as a whole, or for individual properties? I'm sure different people will have different opinions. I'm just looking for some perspective I guess.

If it makes a difference, I'm looking into 30 year fixed loans and planning to keep the properties for the entire 30 years.

Jeff Joachim · Answer

@Matthew B., congrats on having a successful portfolio that you own free and clear. I'd probably start by doing the following:1. Rank your properties in a spreadsheet with priority given to properties with the most equity and highest cap rate/yield. 2. I would add a column specifying the max amount you would be able to borrow without falling into negative leverage from each property. Example: Property A- you can pull $30k max, based on a loan payment of XYZ dollars and still be in the clear. 3. Total up the amount of equity you can safely pull from each property based on your goals. For example, the goal would be to know 7 of the 10 properties you own would allow you to pull a total of $180k. 4. Armed with the knowledge that you have access to up to $180k in capital, you have a budget to work with. If you only need $50k for your next project, then you may be able to simply pull a line on just 1 or 2 properties. If you are ready to start firing away with all of your available capital and want to try to save some money on lender fees, then do a blanket loan. Best of luck!

Luke G. · Answer

If it were me and you're planning on putting them on 30 year fixed, you're going to need to do it individually. For the most part portfolio lenders with commercial notes can't do that 30 year locked product, but they can do one larger loan across multiple properties (won't be as good of a rate). If you go the fannie/freddie route they won't allow you to put multiple properties under one loan, so you'll need to do them individually. This is just me, but what I would personally do is pull out the ones that can handle 70% LTV and put them on a 30 year and open a LOC against the others that you'll have access to and use for short term money (make cash offers, rehabs, etc) with the intention to pay the lines down pretty much immediately. That way you're only paying interest on the money you're using with the LOC's and you have that 30 year locked in rate on the others so you're accessing some of that equity as well. Just my .02, it's worth what you paid for it :)

Jeff Joachim · Answer

@Matthew B. My gut tells me that it would be more beneficial to run with more loans, and not having negative cash flow on individual properties if those were my options. Compromising the integrity of the individual performance of each property in favor of fewer loans and a bump in cash flow isn't worth it. In the event you ever have to liquidate individual properties in your portfolio, or the market takes a turn, you are instantly converted into a distressed seller. It is easier to sell individual successfully performing properties vs trying to move the entire portfolio. If you are unhappy with both scenarios, I'd keep digging to find better options vs jeopardize your portfolio. Aside from being an investor that does investment deals throughout Florida and Ohio, I also am a real estate broker and owner of a title company that specializes in helping investor's with their portfolio. If you need help with anything, I'd be happy to share any resources I have.

Matthew B. · Answer

Thanks, Jeff! I actually did something similar to what you're describing. I figured out the max amount I'd be comfortable with borrowing against each property, an amount that wouldn't push cash flow too low, and then added everything up. To use your example, it's $180k. The question then becomes, do I borrow $180k against all of the properties at a low LTV, or do I pull the entire $180k out of only a few properties at a much higher LTV? The second scenario would result in fewer mortgaged properties and would increase the cash on cash return of the portfolio as a whole, but if you look at the mortgaged properties individually they may each have negative cash flow. I guess this is essentially what I'm trying to figure out/decide.

Matthew B. · Answer

Hey Luke, I've actually found a few lenders that are offering loans with 30-year fixed terms. Lima One Capital and Kiavi (formerly LendingHome) to name a couple. I do have a line of credit against some of the properties. I'm looking for more permanent financing this time around since the money from the refi will be used to purchase additional long-term rentals.