Non-recourse loans with bigger deals

Previously I have expounded the importance of buying large apartment communities because there is value in the economies of scale associated with larger buildings. Would you rather have to deal with and worry about 100 different foundations and roofs or just one or two? Exactly. Other advantages are on the management side, such as leasing and advertising which scales well for larger properties. Another less obvious benefit of investing in larger scale multifamily properties is the ability to finance the acquisition using a non-recourse loan. A non-recourse loan means that if the investment were to fail, the bank would not be able to seize personal assets belonging to the owner or owners of the property. This type of loan is valuable in the worst case scenario of foreclosure but more importantly, it allows investors to qualify for larger loans than it would be possible otherwise. Looking at a more common situation, when a homebuyer applies for a loan to purchase a house, the bank looks at that person’s income and assets to determine if he or she would be able to take on that amount of debt. The same holds true even if that person is looking to buy the single family home as an investment property. This often frustrates early investors because they may find a great investment property which would make more than enough income to cover the debt on the property, yet a bank may not be willing to lend on the property because the investor does not have enough liquid assets or a high enough stated income. The solution is to go big or go home! If an investor were to come to the bank with a large multifamily property made up of 50 apartments, the bank would view this as a business loan and not a personal loan, and thus would be willing to provide the debt through a non-recourse loan and not even waste their time evaluating the personal assets and income of the investors. Instead of showing their assets and income, the general partners bring the business plan to the bank for evaluation and receive an additional vote of confidence if the bank’s underwriting comes back positively regarding the investment plan. This type of debt structure is very advantageous for real estate syndications because the limited partners passively investing in the deal do not have to sign on the mortgage and are not personally liable.