Lending options have been limited since 2008, when the credit market seized up, but that’s all changing now. As the housing market strengthens, more and more lenders are emerging with new, creative programs. This is excellent news for real estate investors who want to take advantage of today’s incredible deals. So what are your lending options?
Loans you get from a bank, credit union, or insurance company are called “Institutional.” Institutional lenders are heavily regulated because they are not lending their own money. For example, a bank lends out the money deposited, and insurance companies lend out the money paid to them as premiums. While strict banking regulations help protect those depositors’ funds, it also severely limits the lender’s ability to issue loans.
Lenders using their own money are not subject to the same regulation as institutional investors. Private lenders dried up during the recession but are now returning to the market.
Non-recourse financing simply means that the lender can’t come after you for the deficiency in case of default. In other words, if you can’t make your payments for some reason, the non-recourse lender can take the collateral property, but they cannot come after you personally if the collateral does not cover the full amount owed.
Commercial loans are often non-recourse, but 1-4 unit residential loans are usually recourse. That has been highly frustrating for self-directed IRA investors looking to leverage their retirement funds with single-family home rentals because the IRS only allows IRAs to obtain non-recourse financing.
Financing Your LLC
Many investors want to own property in an LLC for asset protection and anonymity. But unfortunately, conventional lenders will not lend to LLCs. That has forced many Investors to obtain the loan in their personal name and then transfer the property into an LLC shortly thereafter. While this is common practice, it does violate the bank’s “due on sale” clause.
Most investors don’t worry about it because the commonly accepted belief is that as long as the note is being paid, the bank won’t care that the investor has transferred ownership into a company they own. However, this should not be taken for granted. The bank can indeed call the loan. You would be forced to either transfer title back to yourself for a fee, find a new loan, or come up with cash to pay the bank back.
Non-recourse financing allows your LLC to obtain financing, offering asset protection and anonymity.