Subject To & Non Recourse Private Lending - powered by Happy Scribe

When most real estate investors are getting started, they generally don't have hard money to invest in their own deals. However, even though you might not have cash in the bank to pay for your investment, there are still financing options that you can leverage. If you're looking for a loan for an investment opportunity, consider borrowing earning money from private lenders by way of a non recourse loan. This video starts in three, two, one.

All right guys, thanks for joining me on Let's Talk subject two. If you would please go down and click on the subscribe button and then after that, click on the notification bell to be notified every time I upload a new video regarding subjectto real estate investing. Okay, so let's jump into this lesson on non recourse financing. First, we're going to have to define what the difference is between recourse and non recourse financing. So let's define that.

Recourse financing provides lenders full recourse to the personal assets and or cash flow of the individual borrower for repayment of the loan. In the case of default, if the borrower fails to pay his or her lenders according to the agreement, which by the way, is going to come in the form of a promissory note that is secured by the asset through a mortgage or a deed of trust. So if the borrower fails to pay his or her lenders according to that agreement, the lenders will then have recourse to the assets and revenue of the borrower without limitation. In contrast, non recourse financing is a loan that doesn't allow the creditor to come after the borrower. And ideally, you want to structure the loan agreement so that the lender cannot come after any of your business assets as well.

So for example, if I borrow money from you or my company borrows money from you and I say I want it non recourse, you can't come after me personally. You can't come after my personal assets or business assets if you have it structured correctly. If by default you can only have recourse or go after the asset that secures the loan. Another example might be that I give you the title to my car. You can then go after my car if by default and repossess it.

But you can't come after me personally if my car doesn't satisfy the loan when I default. This is a non recourse loan. Now in a typical loan, you're generally going to see the borrower personally guaranteed a loan. But in a non recourse loan, the bank only has a trustee against the property and they can't come after the borrower themselves. The trustee or lean against the property is their only recourse.

It's non recourse against the person. And as I stated previously, in a perfect world you wouldn't want to risk the cash or the assets that your business owns either. In a true non recourse situation, the lender's only recourse is the asset that was purchased with the funds provided by the lender, plus any monies that you have put into the deal as well. One particular situation you might see in real estate is with IRAs or retirement plans. You might have an IRA or a self directed retirement plan that goes out and sets up an LLC and buys real estate that is building a cash flowing portfolio for the IRA.

An IRA can own real estate and have a loan against that real estate. Most institutional non recourse lenders are going to ask for a minimum 40% down and they're going to want to see about 10% of cash reserves inside the LLC. That's a total of 50% cash brought to the deal by you as the borrower. Now let's say you have, I don't know, $100,000 in your IRA. You now have the ability to buy two cash flowing assets worth $100,000 each with non recourse loans at $50,000 each versus one asset with your $100,000 cash out from your IRA.

So if you default on either of these loans, the lender can only come after the assets and not you personally. The default may show up in public records if the lender has to sue to take possession of the asset, but it will never show up on your personal credit report because you did not personally guarantee that loan. So how does this pertain to subject to real estate investing? Many real estate investors who buy houses using subject to financing oftentimes run into a very common situation where a property is going to need some renovations or maybe some updating. But the investor might not have the funds needed to make those repairs and get the property into the type of condition that would attract a top notch tenant or an owner finance buyer, for example.

This is where non recourse private lending comes into play. It's fairly common for real estate investors to branch outside of traditional lending programs and instead use private money to finance all or part of an investment. Using private funds to invest in real estate can be beneficial for both the investor and the private lender, allowing the active investor to purchase a new investment property while the private lender receives a return on their investment capital. So let me ask you this why not bring a private lender in to fund your rehab costs? This is an ideal scenario that allows a private lender to invest much smaller sums of money into asset backed investments and earn great returns on their capital.

Your lender will need to take second lien position that is going to be subordinate to the primary lender who is in first lien position, but they're also investing much smaller sums of money into the deal and they'll have the ability to foreclose on, you know, in case of default. For the investor, it's an opportunity to put a deal together with little to no money out of pocket and earn monthly cash flow from the property when it's leased to a tenant or sold off to an owner finance buyer. Of course, the deal has to make sense financially, and it must cash flow. But if you have virtually nothing out of pocket in the deal and the property has positive cash flow, why not get private money into play? Okay, guys, thanks so much for joining me here on Let's Talk Subject too.

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