Recourse vs. Nonrecourse

7 Replies

So say the only asset my LLC owns is just a single property, which was paid for in cash worth 100k. So I have 100% equity in the eyes of the lender. When I go to do a cash out refi for my next investment property, will I be able to have that cash refi loan be a non recourse loan? Or are refinance loans always recourse? What if since the property ownership is in the name of the LLC, can I qualify for a commercial loan which I could have be a nonrecourse loan?

It depends on the lender, not the fact that it is a refinance.

I should add that it also depends on state law.  In some states, such as California, acquisition financing is treated differently than subsequent financing (depending on other facts, such as whether owner occupied).   So in addition to lender requirements, you should know also how the law of your state impacts the question.

For that dollar amount and scenario, unless you want a really low LTV, you can expect to be asked for a personal guarantee - so that is about as full recourse as it comes. There are lenders who lend to SDIRAs who do non-recourse, but the LTV will be lower than you might want to accept.

Thanks guys! Really appreciate the input!

Just to play devils advocate, in this same scenario, could my LLC sign as the personal guarantor? So if I only held one property in this LLC, and the LLC were to default on the loan, the lender could take the property, but since there were no other assets to take within this LLC, the lender couldn't come after me personally for the remaining deficit?

Originally posted by @Samuel S. :

Thanks guys! Really appreciate the input!

Just to play devils advocate, in this same scenario, could my LLC sign as the personal guarantor? So if I only held one property in this LLC, and the LLC were to default on the loan, the lender could take the property, but since there were no other assets to take within this LLC, the lender couldn't come after me personally for the remaining deficit?

 Are you planning on defaulting? 

Samuel you are talking about a corp. guarantee.

The LLC you would establish would have no past track record or performance history so the LLC guarantee would be worthless to the lender.

The bank wants you on the hook personally. Think about how many loans a bank makes versus how many properties you have bought. This is not their first rodeo and they have lender attorneys on call for the legal docs to advise them.

Generally I find the LTV they want for non-recourse such as 60% LTV or lower kills cash on cash unless they let the seller hold a second loan on top. In this way the bank is still at only 60% ltv but you are putting less overall money down with the seller held 10 to 15% second to make COC work better.

You can do a personal guarantee but have it limited with the bank on the loan or have it a requirement that the loan becomes non-recourse once a certain LTV is hit with the loan over time. The banks will just throw the boilerplate forms at you but if you do not ask you do not receive. You have to fight for every edge in the investing world you can. Over time those little victories stack up to make a big difference.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here