Is there any way to make millions in RE without taking on recourse loans at some point?

13 Replies

I wanted to have a discussion with regards to recourse loans.  I'm referring to loans (usually construction or acquisition) that you get from a lender that require a personal guarantee.  In the even a particular project does not work out, the borrow is personal liable to the lender and the lender may come after the borrower's other assets to recoup their loss.

I hear so many people on the forums talking about how they want to build spec homes, do large development, own apartments buildings, etc, but are people really aware of the risk in doing so?  Default on a recourse loan and that usually means personal bankruptcy.  

Most spec builders, developers and major commercial/apartment players I know don't blink an eye at personal guarantees and continue to push their chips "all in" on a regular basis.  I'm beginning to think people who do that regularly are born that way.

Is there a way to become a major player (let's say over $5 million in net worth through real estate) without having to take on recourse loans at some point in one's career?

A couple quick examples:

1. You want to be a developer.  Most/all construction loans are recourse.  Apartment buildings, spec homes, office, retail, you name it...project doesn't work out and meet predetermined hurdles and/or you can't lease up or sell, game over.

2. You want to own large apartment buildings.  Once you get into the Fannie/Freddie space, have a strong track record as a sponsor, etc you can typically get non-recourse loans, but for argument sake let's say these deals are 100 units+.  Building up to that point with 10, 20, 30 unit deals means you'll be getting bank loans and signing personal guarantees/recourse.

3. Buying single family rentals and/or 4-plex and below.  Unless you want to own 100s of individual homes, when you are ready to trade up into commercial/apartments (see #2), you'll have to start dealing with recourse loans.

What am I missing?  Is there a way to achieve a $5 million net worth in real estate without taking on recourse loans and signing personal guarantees at some point in your career? 

Good questions @Account Closed ! The smallest non-recourse Fannie loan I heard of was $750K. It would require prior experience in apartment ownership though. However, if you go into a large project with an established sponsor you will not have to guarantee any loans unless you want to. That will also count as "ownership experience". So my guess is that after 2-3 partnerships you may be able to qualify for your own non-recourse loan. 

Disclaimer: I have only theoretical knowledge of this stuff and have not done it myself.

Yes, you can do it with private money or do a partnership.  Just like a bank any reasonable partner is going to want to see a track record.  

Account Closed is correct on the use of private mortgages. Start diligently using resources you can cultivate and then deal in the future with your track record. You will be surprised how many bees come out for your honey when you have a successful track record. The secret in real estate is to find investors, not properties. REI is a people business.

@Bill Pohl @Chad Lubke thanks for the reply.

Can you give me an example of a larger deal using a private mortgage?

Many bank and private lenders understand that you cannot personally guarantee a loan made to your retirement plan. It might cost more for the loan, but if you buy leveraged properties through your self directed IRA or 401k, you are prohibited from signing a personal guarantee.

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I use private mortgages on 90% of the land deals.  I have one lot that I bought and another I am closing on in a few weeks that I used 100% financing with a private mortgage.  I am also the realtor on those deals so I get some of the commission back (have to pay attorneys fees etc).  As for construction I have one private investor who lends 70% of the cost.  I also know of a company in Florida that does spec financing, here is what they are offering:

Builder Specs: Loan Amounts up to $300,000,Non-Recourse Loan, Up to 65% LTV/70% LTC (SFR only), Free and Clear real estate owned can be used as collateral to reduce or eliminate down payment, 12 month term, No Credit, Income or Asset minimums

I have never used them before as we are building homes beyond that price point...

I would just point out that you can make it to 5 million in net worth with many, many fewer than "hundreds" of SFRs, and without ever needing "trade up."  5 million would buy about 20 average homes in my immediate area, or maybe 10 in a few towns within 15 minutes drive.

Can you get to 10 pretty decent SFRs, over the course of a career, without commercial loans?  Sure can.


Most of the commercial loans my firm handles are non-recourse.  These loans are typically above 2 million for retail, apartment buildings, office, industrial, hotels and self storage facilities.  The loans are for preforming assets. 

I recently saw a building in North Texas that could be bought for 2.4 million.  It is an office building at 40% occupancy.  On a building like this, you could buy it with a recourse loan (bridge loan), ramp up occupancy to 90%, then refi the property into a long term, non-recourse loan at close to 5 million taking cash out.  Would get you half way to your 5 million net worth.


Seller financing may be another way. Also, I've been doing a lot of research recently into commercial lending and have been told by lenders that recourse loans can often be negotiated so that the recourse lessens and / or expires over time.

@Mark Creason  well you are taking recourse risk until the building is at 90%.  I've been involved in many large apartment deals and turning a building around is far from risk free.

I'm honestly still not convinced.  

@Chad Lubke  the private investor lends 70% of total cost without a personal guarantee?  Any collateral needed to be put up?  

Yes typically collateral is the land on a construction loan hence the lender only going to 70%.

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