11. BRRRR Strategy – Using Recourse vs non-recourse
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.
Financing your BRRRR property has many variables offered in the loan and how it is structured. Let’s explore one important element of the loan, recourse vs. non-recourse loans.
Most all owner-occupied loans are recourse loans. This favors the lenders and allows them to take possession of all assets used as collateral to secure these loans if borrowers default on their obligations and fail to repay their debts. If the lender takes back the collateral (property) and sells it for less than the amount owed, the lender can go after the borrower’s assets for the difference.
A non-recourse loan benefits the borrower. Lenders can collect the collateral but may not go after the borrower’s other assets. The lender sells the property for less than the amount owed and cannot go after any remaining balance on the mortgage from the former owner. The lender must take it as a loss.
This is the reason why borrowers almost always favor non-recourse loans, while lenders almost always favor recourse loans.
Depending on the lender and the type of assets to be financed, will determine whether a non-recourse loan is offered. If you are financing a commercial loan with multiple SFR into a single portfolio loan or a multifamily loan into an LLC, most lenders will offer non-recourse. If you are financing one SFR as an individual, more than likely the lender will only offer a recourse loan. If the lender offers a non-recourse loan, it’s at a greater risk to them so expect a higher interest rate. This difference in the interest rate could be 1/4% to 1%.
If you have a $100K loan, 30 yr. note at 5.2% recourse with 30 yr. am, the total interest payments would be $97,679.92. If the rate with a non-recourse loan was 5.78%, the total interest payments would be $110,772.81. That’s an additional $13,092.89 in interest payments.
If the non-recourse loan is offered and you can absorb the higher interest rate and still achieve your cash flow targets, then this would be the most attractive option.
There is nothing wrong with financing using a recourse loan (if that is your only option) provided you understand the risks of defaulting. Remember, you will obtain the benefit of a lower interest rate, less interest paid over the life of the loan, and with more income in your pocket.
Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email jonathan@reitrader.com
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