Loan Terms

[Rob B.]

I've been investing in SFRs for the past three years, but I'm trading up to start investing in small apartment complexes. We're about to close on a 16 unit apartment complex with assumable financing, which is fully amortized with another 23 years to go. 

I know that most MF loans are balloon payments after five years or something similar; my question is: is it common to refinance the loan or to get another loan when the balloon payment is due, or is it not worth it? What I love about real estate is that I can hold it for 10-20 years and I'll have a steady, exponential stream. Switching to Commercial Real Estate, I'm worried that those balloon payments might come due when the market is down or when I can't sell. 

[Joel Owens]

Rob most of my clients go for non-recourse debt. If a property later experiences problems the lenders only recourse is against the property and not the borrower unless you violate the carve out provisions.

The non-recourse is good because the lenders are more apt to do a work out on the loan than take back a defaulted property.

Example you put down 1 million on a 4 million property. 5 years from now on a 10 year loan call the market is bad etc.  In this scenario you are worth 15 million. If you had full recourse the lender would say we do not care the property is losing money and you will pay the note or we will come after you etc.

If it's non-recourse it doesn't matter if you were worth 50 million they do not have access to that. The lender loses a lot of their negotiating leverage with  non-recourse on a problem property.