Can you avoid personally guaranteeing mortgages through business?

[Adolphus Fletcher]

Let's say I already formed a new LLC that would be designated for REI. How do I get business credit strong enough to avoid having to personally guarantor commercial or residential mortgages through my business? Is that unavoidable in the beginning? Does it matter if it is an LLC or S-Corp? When I talk to loan officers they say a DSCR loan would be ideal for even a newer LLC because it's more about the numbers on the deal as long as you have the cash for the average 20% and whatever points down. My only reservation is the higher interest rates on these particular loan products vs regular residential mortgages. Let me know if I'm looking at this all wrong or what you'd suggest.

[Patrick Roberts]

It's highly unlikely that you'll get a DSCR loan without a PG at this point. Business credit is largely irrelevant until you get into the true CRE and commercial lending space, and even then, the key principles are weighted heavily. The vast majority of DSCR loans are structured as regular mortgages with the personal income/DTI replaced by the rental income from the property. It's rare to a get a nonrecourse DSCR mortgage without approx 50% down and a ton of credible operating history. The typical formula is 20-25% down + rental income greater than mortgage payment + good personal credit and PG = DSCR. No two products are the same, but most DSCR mortgages roughly follow this pattern.

As for the cost, DSCR loans will almost always be slightly more expensive than Conventional loans. Typically, you can get a comparable rate on a DSCR by paying for it with some combination of points and fees up front. Some lenders will call them points, some will just have points labeled as fees like orig fees, processing fees, UW fees, etc. This doesnt mean DSCRs are inferior products; theyre great for what theyre meant for, which is relatively cheap, permanent financing for real estate without having to jump through the hoops of a Conventional loan.

[Don Konipol]

@patrick 

@Patrick Roberts "It's rare to a get a nonrecourse DSCR mortgage without approx 50% down"

That’s been my experience.  On our syndicated properties we have 2 bank/lenders that issue non recourse loans to us as long as we have 50% equity in the deal. 

[River Sava]

Hi Adolphus –

You can definitely go through an LLC, but it's almost unavoidable that you'll need to personally guarantee the mortgage. While DSCR loans focus more on the property's cash flow than your personal income, most lenders will still require a personal guarantor to reduce their risk.

Keep in mind that DSCR loans typically come with higher interest rates than conventional loans, which is the trade-off for the easier qualification process. If you're growing your portfolio quickly, the added flexibility can make it worthwhile. Happy to connect with you!

[Chris Seveney]

Quote from @Adolphus Fletcher:

Let's say I already formed a new LLC that would be designated for REI. How do I get business credit strong enough to avoid having to personally guarantor commercial or residential mortgages through my business? Is that unavoidable in the beginning? Does it matter if it is an LLC or S-Corp? When I talk to loan officers they say a DSCR loan would be ideal for even a newer LLC because it's more about the numbers on the deal as long as you have the cash for the average 20% and whatever points down. My only reservation is the higher interest rates on these particular loan products vs regular residential mortgages. Let me know if I'm looking at this all wrong or what you'd suggest.

 You are looking at it correctly, as others mentioned trying to avoid a PG is challenging, especially when starting out. 

[Rob Beeman]

@Adolphus Fletcher Like others have mentioned, gaining a non-recourse loan is a challenge unless in some cases where the loan is a commercial style loan of $5MM+ and the borrowing entity has strong income & assets to satisfy the lender's concern tied to the guarantee of the loan. However, if you choose lenders that originate the loan (purchase/rehab/DCSR) to the LLC (entity) and do NOT report to the credit bureaus then as long as you do not default on a loan, the odds are slim that your borrowing activity will appear on personal credit. Just make certain to pay as agreed and exit as planned.

[Adolphus Fletcher]

Quote from @Rob Beeman:

@Adolphus Fletcher Like others have mentioned, gaining a non-recourse loan is a challenge unless in some cases where the loan is a commercial style loan of $5MM+ and the borrowing entity has strong income & assets to satisfy the lender's concern tied to the guarantee of the loan. However, if you choose lenders that originate the loan (purchase/rehab/DCSR) to the LLC (entity) and do NOT report to the credit bureaus then as long as you do not default on a loan, the odds are slim that your borrowing activity will appear on personal credit. Just make certain to pay as agreed and exit as planned.

 I'd be interested to find a list of lenders that don't report. I haven't heard of such yet. 

[V.G Jason]

We avoid PG by putting 50-80% down for DSCRs. We've negotiated some in a portfolio where a certain house will be at 25-30%, maybe even as high as a 35% but the loan is less concentrated in houses with less of a downpayment(10% needed for a STR).

This takes a relationship with the lender, though. They also required X amount of reserves always to be shown available, which was actually less than what I earmarked so I am okay with it. We don't have a PG for any of our DSCRs, and tax wise have it completely separate from personal. That's why we have our LLCs and the set up we do-- complete separation.

[Erik Estrada]

Quote from @Adolphus Fletcher:

Quote from @Rob Beeman:

@Adolphus Fletcher Like others have mentioned, gaining a non-recourse loan is a challenge unless in some cases where the loan is a commercial style loan of $5MM+ and the borrowing entity has strong income & assets to satisfy the lender's concern tied to the guarantee of the loan. However, if you choose lenders that originate the loan (purchase/rehab/DCSR) to the LLC (entity) and do NOT report to the credit bureaus then as long as you do not default on a loan, the odds are slim that your borrowing activity will appear on personal credit. Just make certain to pay as agreed and exit as planned.

 I'd be interested to find a list of lenders that don't report. I haven't heard of such yet. 

There are many DSCR lenders that do not report to your personal credit report, however there is no benefit in this since you are still a PG on the mortgage. So if you are looking to get a conventional mortgage you will still need to disclose the debt.

[Adolphus Fletcher]

Quote from @V.G Jason:

We avoid PG by putting 50-80% down for DSCRs. We've negotiated some in a portfolio where a certain house will be at 25-30%, maybe even as high as a 35% but the loan is less concentrated in houses with less of a downpayment(10% needed for a STR).

This takes a relationship with the lender, though. They also required X amount of reserves always to be shown available, which was actually less than what I earmarked so I am okay with it. We don't have a PG for any of our DSCRs, and tax wise have it completely separate from personal. That's why we have our LLCs and the set up we do-- complete separation.

Very interested in setting up the LLCs properly to do this. Are you saying your lender allows you to give 10% down for an STR and up to 35% on certain properties because of your relationship with the lender?

[Mohammed Rahman]

Hey @Adolphus Fletcher,

When it comes to avoiding personal guarantees on mortgages, especially through an LLC or S-Corp, here's what I've learned:

In the beginning, it’s tough to avoid personally guaranteeing loans unless your business has strong credit and a solid track record. Lenders want that security, especially with newer LLCs, and often, you’ll need to show personal backing.

A DSCR loan (Debt Service Coverage Ratio) is an option that looks at the property’s cash flow rather than your personal income, which is why many loan officers suggest it for newer businesses. However, the higher interest rates with these products can be a downside, especially compared to traditional mortgages. 🏦

To get to the point where you can avoid personal guarantees, you’ll need to build your business credit over time:

1. Open trade lines in your business’s name (utilities, vendors, etc.).
2. Make sure you’re reporting payments to business credit agencies like D&B.
3. Keep your debt-to-income ratio low and maintain good cash flow.

It doesn’t really matter if it’s an LLC or S-Corp—what matters most is establishing the business as a strong, creditworthy entity.

But yeah, in the early stages, personal guarantees are almost unavoidable. That said, working with DSCR loans can help you bypass some of that, as long as the property itself is cash-flowing well.

[Adolphus Fletcher]

Quote from @Don Konipol:

@patrick 

@Patrick Roberts "It's rare to a get a nonrecourse DSCR mortgage without approx 50% down"

That’s been my experience.  On our syndicated properties we have 2 bank/lenders that issue non recourse loans to us as long as we have 50% equity in the deal. 

I am curious about the syndication, are they affordable housing properties? How much loan to-value do they offer or do they give you the full amount when you have 50% equity? 

[V.G Jason]

Quote from @Adolphus Fletcher:

Quote from @V.G Jason:

We avoid PG by putting 50-80% down for DSCRs. We've negotiated some in a portfolio where a certain house will be at 25-30%, maybe even as high as a 35% but the loan is less concentrated in houses with less of a downpayment(10% needed for a STR).

This takes a relationship with the lender, though. They also required X amount of reserves always to be shown available, which was actually less than what I earmarked so I am okay with it. We don't have a PG for any of our DSCRs, and tax wise have it completely separate from personal. That's why we have our LLCs and the set up we do-- complete separation.

Very interested in setting up the LLCs properly to do this. Are you saying your lender allows you to give 10% down for an STR and up to 35% on certain properties because of your relationship with the lender?

No, not 10% down. My STRs will have only 10% of leverage, meaning 90% down and therefore let me take the opportunity to put only 25% down without a personal guarantee on a (nearby) property I am also investing in. Instead of 50% down +

[Tanner Lewis]

Hey Adolphus - with DSCR you would need to be a personal guarantor, but it would not report to credit (as long as it is in an LLC and you don't go past 90 days late on mortgage payments).

The only nonrecourse loans out there are pure commercial, which carry a higher rate than DSCR.

[Kristi K.]

Quote from @Tanner Lewis:

Hey Adolphus - with DSCR you would need to be a personal guarantor, but it would not report to credit (as long as it is in an LLC and you don't go past 90 days late on mortgage payments).

The only nonrecourse loans out there are pure commercial, which carry a higher rate than DSCR.

My last non-recourse loan was in the low 4% range (less than 3 yrs ago). It’s not rocket science but it’s definitely something that takes experience and skin in the game!