What is the reserve requirement for a nonrecourse loan?

Question

Hello BP experts. We are negotiating an offer for a property (a duplex) and will be using a nonrecourse loan for the financing. Does anyone know what the IRS requirements or guidelines are for required reserves when using a nonrecourse loan? We will be putting 40% down. We want to make sure we have enough funds to close on this deal. They are asking for a counteroffer right now and I'm not sure what to do. Does the required reserve vary by lender? The property is in Cuyahoga County Ohio. The lender I've spoken to is away for MLK long weekend until Wed. and I forgot to ask him this question. My counter offer may not offer enough reserves so appreciate timely advice.

Thank you!

Jeff Rabinowitz · Answer

@Deanna S., if the property is in a Solo 401k you will usually have to pay the expenses through the Solo 401k or you risk a prohibited transaction and the penalties associated with that. That includes any repairs to make the property rent ready, taxes, utilities, etc.. If you have only $3K of reserves you are probably cutting it very thin.

Stephanie Medellin · Answer

@Deanna S.  This is really a lender specific and scenario specific question, so it's hard to answer.  The IRS has absolutely nothing to do with loan guidelines, same for whether it's recourse or non-recourse.

Assuming you're doing a conventional loan, this page below may help you.  You didn't mention whether or not this is an investment or personal residence, or whether you own other financed properties.

https://www.fanniemae.com/content/guide/selling/b3/4.1/01.html

The good news is since you're putting 40% down, you can always reduce your down payment and save at least 15% as reserves instead (if needed) to qualify.

Jay Hinrichs · Answer

@Stephanie Irto  I think there is some confusion here.

non recourse 40% down is most likely a private product  Like Peak lending or Lima one.

there are no IRS rules as you state.. and no guidelines past what the lender requires..

we do quite a bit of this and we have zero requirements  its non recourse its asset based no doc lending all we look at is the ACTUAL CASH into the deal.. it has to be real... and then we need to know that asset is being purchased from one of our vendors that we approve  IE we know the rehab is top notch.. don't want any dummy rehabs.   by usuing these standards and requiring 40% to 50% down I have over 700 of these loans in our portfolio and have had exactly 2 defaults in 5 years..

Deanna S. · Answer

Thank you @Jay Hinrichs.  One of my accounts is Schwab.  Do you have any particular suggestions with them?  This is super helpful!

Jay Hinrichs · Answer

you may want to look at performing notes for IRA  I have been buying those in my IRA since 1982..

less risk if you pick correctly .. and no need for capital calls.. which can happen in rentals

Deanna S. · Answer

Thank you @Jay Hinrichs, @Jeff Rabinowitz, @Dmitriy Fomichenko, @Stephanie Irto for your responses.  We ended up not getting the duplex after all.  I gave a solid offer but they took one just slightly higher.  I think it is for the best.  It was a great experience and I learned a lot through it.

I need to understand the exit strategy better, too, with solo 401k and/or a self directed IRA.  Are there any resources you could direct me to for that?  My husband and I will be 65 in only 16 years so need to be super smart about what we do with our current retirement accounts.   I was inspired into all this by a @BillManaserro podcast in Sept right when my youngest started Kindergarten.  Time to get working again and make money work for me.   I have always been very focused on giving back.

We are under contract for our first property, a triplex, that already has 20% equity.   Happy about that.  This is just conventional and our strategy is buy and hold/cash flow.  If I can be a help to you, please let me know.

Jay Hinrichs · Answer

@Jeff Rabinowitz  exactly  not enough reserves when you have a vacant unit  and potentially C class if its C class  10k would be a better number.. maybe she can contribute right now for 2017 and beef that up....

Dmitriy Fomichenko · Answer

Most non-recourse lenders will require additional 10-15% in reserves.

@Deanna S. check out these lenders to see if any one them will allow you to go up to 70% LTV, this way you will have enough in reserves left:

https://www.biggerpockets.com/blogs/2810/50272-lis...

Deanna S. · Answer

@Stephanie Irto @Jay Hinrichs Thank you for your responses.  We are purchasing the property through trust using a solo401K.  The lender I spoke to requires 40% down.    With the required down, closing costs, insurance, and other prepaid expenses, we will be close to the amount we have in the fund.  From my analysis, we will have only about $3k reserves.  The duplex has one tenant so their is a source of income from day one.  We anticipate having another tenant quickly.   Thank you for any additional insight you have on my question.  I decided not to go up in asking price.  I'll find out tomorrow if I am fact the one who got the contract as there was another offer.

What is the reserve requirement for a nonrecourse loan?

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