By David Goncalves
In “Your First Five Investment Properties” I shared five integral steps to jumpstarting your real estate business. These steps included: identifying your real estate investor team, taking a look at where you are today, setting goals and targets, implementing your plan and lastly, preparing for the next stage in your venture.
In “Using DCR Lending to Take You from 6-24+ Doors” I shared what you will want to take advantage of before closing on your sixth property. These check points included: refinancing your portfolio to maximize your access to capital, reviewing your amortization to improve cash flow, reviewing your portfolio’s equity (including your primary residence), keeping good financial records, and lastly, managing your DCR to ensure successful portfolio growth. I also reviewed the three key components of DCR lending: buy in larger urban communities, purchase quality properties (or renovate to make them quality) so they are marketable, and most importantly, buy for positive cash flow.
In this post, I’d like to share with you how to prepare for the next stage in your venture, now that you have 24+ doors. Most banks have limited door/rental property policies in place and will not exceed five properties, without exception. DCR lenders are also limited, and normally will not lend to more than 10 doors without you having liquid cash or investments of $1 million. Remember, this is not including real estate. Let’s face it, if you have $1 million in cash, you’re not leaving it in your savings account, you’re investing it! An experienced mortgage advisor should be updating your BluePrint and preparing your portfolio for a commercial blanket mortgage two years in advance.
I’m frequently asked, “What is a commercial blanket mortgage?” A commercial blanket mortgage is best described as one mortgage that finances your entire portfolio in first position. Think of it as putting all your properties together and financing it like an apartment building. Therefore, to make your portfolio more attractive to commercial lenders, focus on these 6 key components two years before the identified stress point is triggered:
- Keep good financial records. In your mortgage binder you should always have up-to-date leases, net worth statements, income documentation, property taxes, mortgage statements, and identification. Lenders will be looking back 2 years when analyzing your financials. Furthermore, lenders will require you to report your financials annually. Failure to report can trigger your loan being called for full repayment, plus penalties and fees.
- Be prepared to guarantee the loan. Commercial lenders will insist you personally guarantee the loan. Have your personal and corporate income taxes up-to-date. Also, check your credit rating regularly. This applies to all shareholders and third party beneficiaries.
- Be prepared to incorporate. Commercial lenders would rather lend to a corporation than an individual. The corporation protects the assets from your personal liability. Also, audited corporate financials provide better security and transparency for the lenders. I highly recommend a meeting or conference call between your mortgage agent, lawyer, and accountant before implementation.
- Manage your DCR. Commercial lenders are usually looking for a ratio of 1.25 or higher. That means for every dollar in expenses, you have $1.25 in gross rent. Good positive cash flow is key not just for the initial loan, but also for your annual reporting.
- Review the geographical locations of your properties. Portfolios in larger urban communities are perceived to provide better liquidity in the case of a foreclosure. So, you may need to exclude some assets from the blanket mortgage or you may want to sell properties that don’t fit. Many lenders will not lend in cities with populations of less than 50,000.
- Ensure your properties all show well. The lender will need to appraise all your properties and they want to see them clean and marketable.
As you can see from all three articles, there is much to consider when carefully planning your real estate venture and its growth. Keep in mind, what you do now will have a significant impact on your access to mortgage funds in the future. The support of your real estate investment team ensures you are informed along the way. This allows you to be in control at all stages, ultimately preparing you for the unavoidable stress points as you build your portfolio. If I can leave you with one message, it would be to plan early.
David Goncalves leads Vine Group. David and his team work with national lenders to find better financing solutions for investors. David has been in the mortgage industry for 13+ years. During this time, he has funded approximately $1.3 billion in mortgages. He was Rookie of the year at RBC, and later received Gold and Platinum Club awards. David continues to be a mentor to many Mortgage Sales Professionals. He always refers to the industry not as a sales industry, but rather a ‘people business’.