Often real estate investors find the process of borrowing money much more difficult than it is when they are buying a home to live in. Investors often want to purchase a property in the name of an LLC, or other entity, rather than purchase it in their own name. Many traditional residential lenders will freeze up once they hear you say that. Many don’t have the experience necessary to handle such a request.
One of the questions we hear most often here is this: “I want to buy the property in the name of my LLC, but I don’t want to be personally responsible for it. Can I do that?” The answer is yes…if your lender will let you.
The term you need to know with respect to this question is the term “Recourse”. This simply means that, even if an entity such as an LLC is the borrower on a loan, you personally are still responsible for it when you take out a “Recourse” loan.
Let’s go through a transaction and talk about the parties that are involved. If an LLC is borrowing the money, then it is the “Borrower.” Simple enough, but most of the time the lender will want you to back this loan with a “Personal Guaranty”. This means that if the borrower doesn’t pay, the bank has the right to come after you, the “Guarantor” for payment. This right is known as “Recourse.”
You might say, I don’t want to guaranty the loan personally. I won’t do it. Well then, most traditional banks will tell you they won’t do the loan, but in some instances they will allow your entity to purchase the property without you guarantying. This is simply called a “Non-Recourse” loan. In this instance, if the borrowing entity defaults, there is no “recourse” against you.
When might a lender allow a non-recourse loan to take place. Usually, commercial banks will require it unless the borrower is an entity where having a personal guaranty is not practical, such as in the instance of a borrower that is a Non-Profit or a Publically Traded Company. The other instance where you see non-recourse loans pop up is when the borrower is someone’s IRA. The IRS will not allow a person to guaranty a loan where the borrower is their IRA. Another instance where you might see a non-recourse loan comes in the cases where the loans are much larger on such properties as apartment complexes, retail centers, and larger office buildings.
The question of recourse on a loan can be complex. Reach out to me through the Contact section if you have any questions and I’ll be happy to do my best to shed light on the issue.