Do Investors generally also guarantee the loans?

Question

I'm looking at a multi family unit on the MS Gulf Coast (this will be my first deal) and running the numbers. Still waiting on the rent rolls from the current owner, but so far the numbers are working out. I don't have the $70k I'll need for the DP, so I'll need to bring in a partner or investor. But, the bank said that anyone owning more than 20% would also be required to personally guarantee the loan. Is that something that would turn away an investor? In my mind they want an investment, not take on debt.

Robin Simon · Answer

For DSCR loans, generally its a requirement from most lenders that anyone with above 25% (not including = 25%) would be required to guarantee. Typically banks are a little more stringent, so the 20% lower number there makes sense. To get to non-recourse multifamily, you'd probably need a commercial lender and the property would likely have to be worth a lot / big for it to make sense there (properties generally worth more than $3M or so)

Mohammed Rahman · Answer

Hey @Pepper Bradford - this isn't an odd request from the bank, especially given your experience. It could also mean you should start talking to other lenders. I personally haven't invested in commercial multifamily deals with my own funds yet, but a PG isn't uncommon to have in the loan terms.

Don Konipol · Answer

I don’t know any knowledgeable investor who will PG a loan secured by a property he’s not totally in control of. When you reach a certain size, experience and expertise you’re able to eliminate personal guarantees. We have a deal with 2 banks in which if we have 40% or more equity in a property we don’t provide any personal guarantees. Some lending institutions will accept a partial guarantee, so that if someone owns 20% of the project he guarantees 20% of the loan amount. For a passive investor, guaranteeing a loan incurs four major problems. First, the equity/liability equation is out of wack. Even if he owns 30% of the equity, he’s responsible for 100% of the loan. Second, his future borrowing capacity is lowered. Third, he’s now responsible for a loan secured by a property of which he’s not the decision maker. And finally the risk/reward ratio is too high; he has say a 30% of the reward but 100% of the risk.The reality is that lending institutions don’t want to deal with small syndicated deals. They’re just not profitable. A 5 million loan on a syndicated deal might qualify for a lending institutions rules for syndicated transactions, while a $500,000 loan would not and would have to qualify under the lender’s small commercial loans guidelines. This would usually mean everyone with an ownership interest personally guarantees the note rather than just those with a 20% or more ownership interest. Smaller transactions are better closed with only one financial partner. The problem is that this type of transaction subjects the sponsor to scrutiny in that the investor wants to know why he shouldn’t just buy the property himself and perhaps pay the sponsor a finder fee, or a small interest in the property. Many sophisticated investors will only invest in deals that are in compliance with SEC Reg D, which will cost the sponsor $10,000 +, and in deals where sponsors have a significant amount of their own capital invested. Further, they will limit themselves to offerings where the sponsor “promote” is limited to 20% or less, and paid out only if and after the outside investors get their money back plus a predetermined return on invested capital. This is nowhere near what small first time sponsors think, they’re usually thinking in terms of keeping the majority of equity for themselves.That being said, smaller deals are being done all the time; it’s basically a whatever you negotiate type thing. These deals are utilizing either the SEC general exemption for private offerings, a state securities intra state exemption, or a joint venture/equal partnership purchase. And everyone has to start somewhere. The best way to start in my opinion is to find an investor who wants to invest in real property but has no time or desire to find, analyze, vet, or manage deals himself. Hopefully you will possess a real estate license and can charge a commission on the purchase/sale and invest that in the down payment. Theses small investors do exist. They can often be found at real estate meetings, real estate investment clubs, and even real estate forums.

Jay Hinrichs · Answer

thats not necessarily true like whats being discussed those with less than 20% interest do not need to PG.. and in the real world your going to have a very tough time getting an investor to put up the equity and ALSO guarantee the debt at that point what do you bring to the table ?? thats how they will look at it or if its a great deal they will want you to take a small slice of the profit ( thats for experienced investors) you may find those that are new and dont realize the risk they are taking on and you can talk them into doing this for U. Also keep in mind with and LLC you dont have to have even distributions like corps.. so someone could have 10% of your LLC that owns it but their profit share is 90% of profit.. I have set up many like this ..

Jonathan R McLaughlin · Answer

@Pepper Bradford for all intents and purposes they ARE borrowing the money themselves. Being on the loan doesn't mean they are on the hook for their equity share (say of 20%) it means they are on the hook for the whole thing. This will effect their debt ratios etc. So yes, for a good chunk of people it will kill the deal. Not a lot of difference to you for 19% though.

Chris Seveney · Answer

@Pepper BradfordBetter off finding an investor pay cash for the deal. Realize though that your equity if that was the case would be very low but something is better than nothing

Don Gurganus · Answer

Seasoned investors are likely aware of these requirements. Develop a mindset of seeing the deal funded and let go of worrying about other people's fears. It's nothing you can control. Focus on the things you can control, hold the vision of success, and take the necessary actions to create your vision. Your fear is justified and I hope you see it as a friend. Once you punch through that "terror barrier" you will be a transformed person with a clear path on how you got there!

Frank Greg · Answer

You may have to look into other funding sources that have a different requirement or structure the transaction differently. If you did not qualify for the loan by yourself (which doesn't seem to be the case), then you would need a secondary obligor (co-borrower). Your investor may not necessarily want to offer a guarantee in addition to offering you the down payment.

Pepper Bradford · Answer

I think I must have asked the question wrong. I don't have a problem with the lender requiring it, regardless of the % ownership. It seems perfectly natural to me. My question is about what the Investor is going to think. I'm asking them to put up the Down Payment, and "oh by the way" they have to jump through all the hoops as if they were borrowing the money themselves. Isn't this going to kill the deal for them?

Dave Skow · Answer

@Pepper Bradford- thanks - 1) anyone thats bringing in funds for the down payment on a inv purchase will need to be a co borrower and go on the loan / title 2) this isnt anyhting unique or new for traditional lenders 3) many investors will balk at having to provide your lender all their financials / tax returns etc ....maybe you can find some that are OK with this