Overcoming Personal Guarantees

7 Replies

My business partner and I have collected a few residential rental properties (2-4 units) in the Indianapolis area and we are now looking to move up into commercial multifamily properties. Our strategy is to acquire these properties via a 1-year interest only acquisition/bridge loan and then flip it into long term fixed rate FHA financing. The acquisition loan is necessary to provide the time required to perform all of the third party reports necessary for the FHA financing we are targeting.

We both work in the multifamily family development world (one in finance and one in legal) and are familiar with the loan products we are pursuing. The major hurdle we have is that these products typically require personal guarantees, regardless of the corporate structure that is set up. As a rule of thumb, the guarantees require a net worth equal to the amount of the loan and 10% liquidity.

A property that we are eyeing right now would require a loan amount of about $4.5 million, and we are not close to having a combined net worth of $4.5 million or liquid assets of $450,000. My underwriting is showing that is a strong property and would be a great investment, but the guarantees requirements are becoming a real impediment to our plans on growing our business. (Obtaining equity investors is not a problem at this time)

Does anyone have any advice on how to overcome a hurdle such as this? This is a chicken and egg scenario…. This kind of deal would help us get the net worth to do more deals like this, but we can’t do the deal because the lack of net worth. Any advice would be appreciated. Thank you!

I think we can talk and see if something works out for both of us and we have a net worth and liquid assets.

Dusty,

In my experience a personal guaranty is pretty standard. There are lenders I know of that will forgo the NET worth requirement that you mentioned, but liquidity is always required. You can get very creative showing liquidity with IRA, Life Insurance, and even available 'credit' on the business end as well for many banks.

I'm happy to talk about it more if you wish.

--Dan

@Dusty Israel have you tried asking about this in the multi-family forum?  You might get some better responses in that forum.

Originally posted by @Dusty Israel :

My business partner and I have collected a few residential rental properties (2-4 units) in the Indianapolis area and we are now looking to move up into commercial multifamily properties. Our strategy is to acquire these properties via a 1-year interest only acquisition/bridge loan and then flip it into long term fixed rate FHA financing. The acquisition loan is necessary to provide the time required to perform all of the third party reports necessary for the FHA financing we are targeting.

We both work in the multifamily family development world (one in finance and one in legal) and are familiar with the loan products we are pursuing. The major hurdle we have is that these products typically require personal guarantees, regardless of the corporate structure that is set up. As a rule of thumb, the guarantees require a net worth equal to the amount of the loan and 10% liquidity.

A property that we are eyeing right now would require a loan amount of about $4.5 million, and we are not close to having a combined net worth of $4.5 million or liquid assets of $450,000. My underwriting is showing that is a strong property and would be a great investment, but the guarantees requirements are becoming a real impediment to our plans on growing our business. (Obtaining equity investors is not a problem at this time)

Does anyone have any advice on how to overcome a hurdle such as this? This is a chicken and egg scenario…. This kind of deal would help us get the net worth to do more deals like this, but we can’t do the deal because the lack of net worth. Any advice would be appreciated. Thank you!

Hi Dusty and welcome to BP.

I doubt you're going to find a lender that doesn't have requirements for net worth and liquidity. Having these requirements, especially the liquidity requirement, helps protect their own interest and make sure you are ready to purchase a property of this magnitude. There is a huge difference between running a couple doors vs an entire apartment complex. I purchased my first complex over a year ago (114 Units) and I assure you it comes with many headaches that a typical SFR rental does not. It also has many advantages and ultimately we decided to liquidate our SFR holdings in favor of apartment complexes.

With that said, we ran into the same problems you did, but we were able to convince the owner to finance the property with a 10% down payment at 6%. At the time, I thought this was ridiculous, as I was expecting a loan in the 4% range, but looking back, I don't think the deal could have been done any other way.

I think you'll find that once you get your foot in the door and you have a track record, getting financing for future projects won't be as challenging. We're currently exploring loan options with banks for a second complex, and the same people who wouldn't even talk to us two years ago are now interested in lending to us.

-Christopher

This post has been removed.

@Dusty Israel

It sounds like you need a sponsor.  They will put their net worth up to qualify for the loan for a cut of the profits.  All terms negotiable.  I'm assuming you're looking to local banks to finance the acquisition and that's why you're running into the personal guarantee?  PM me if you'd like to connect.  I'm buying apartments in IN and KY and would love to meet you.  

Create Lasting Wealth Through Real Estate

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

Start here