The Pros and Cons of Non Recourse Loans

There are no shortages of decisions to be made when it comes to real estate investment. Aside from all the purchasing aspects to be considered, there is the very important financial areas that must be addressed and dealt with which, of course, pertains to what funding you have, compared to what loans you must arrange.

Once you become involved in the financial arrangements for your prospective investment you are going to hear the term non-recourse loan. This is something that is going to be quite important to you and you will want to feel familiar with it to help you with your decision making.

Recourse and non recourse:

Perhaps if you have purchased a residence in the past, then you are probably familiar with the basic terms of the loan (mortgage). This is in reference to if you default on the payments the loan holder can seize your residence and sell it to recoup the balance of money owing on the mortgage. If the lender does not receive what is still owed plus costs incurred after selling the property, then you are still responsible for the balance owed. If this loan had been a non recourse loan then this would not be the case. This particular loan is a recourse loan.

Pros:

If it were a non recourse loan, then the lender would have to settle for whatever he sold the property for, and could not come back on you for any balance owed on the loan or additional expenses.

Cons:

Sounds like a great solution or protection for you as the borrower and it is, but there is a price to pay for this type of added protection.

To begin with you will have to do some shopping around to find a non recourse lender. As you can see the lender is at a bigger risk here, therefore not as many financial investors are willing to make this type of lending opportunity available.

You will most likely find when you locate a non recourse loan lender that the interest rates on this type of loan are going to be higher in order to offset the lender's risk.

Use your reasoning skills:

Using good reasoning skills though may help you take advantage of a non recourse loan and be able to reduce the overall cost of borrowing. For example, even if you are going to be paying a higher interest rate you can opt to make bigger or more frequent payments.

The important thing when doing any type of real estate transaction is not to develop tunnel vision either in the purchasing or financing segments of the venture. In other words, just because the interest rate is going to be higher on the non recourse loan, don't exclude its viability. Crunch the numbers and see what puts you in the most comfortable position for your real estate investment.

By getting yourself some basic real estate education and applying your newly found knowledge in this area in a very short time you will become a business realty investor, whether it be in one simple investment transaction or several.