Owning a rental property can be a great investment and added source of income. A non-recourse loan is a specific type of loan that’s used to finance a rental property. With a non-recourse loan and rental property in mind, you could be well on your way to building your financial portfolio.
What’s the difference between a recourse and non-recourse loan?
If you fail to pay your mortgage and have a recourse loan, the lender will take your property and you’ll still have to pay the difference on your loan.
A non-recourse loan is a safer option for borrowers. In the event you can’t pay your mortgage, the lender will still take your property but you won’t pay what’s left on the loan.
How does a non-recourse loan work?
Non-recourse loans are unique in that they work with self-directed IRAs or Solo 401ks (individual retirement accounts). In order to qualify for a non-recourse loan, you have to have enough in your IRA to put down at least 40 percent of the property down, plus reserves.
What can a non-recourse loan be used for?
Non-recourse loans can be used to purchase the following types of property:
- Residential: We’ll list the specifics of residential properties that qualify below.
- Agricultural: You can buy agricultural land and lease it out, generally for crops or livestock.
- Commercial: From commercial office buildings to smaller spaces that will be used as businesses, a non-recourse loan can finance this endeavor.
- Multi-Unit: Apartment buildings or houses that have multiple units available also qualify.
It should be noted that a non-recourse loan can not be used towards renovation. If you see a fixer upper you like, know that this type of loan will not finance that project.
There are some very specific guidelines to whether a home qualifies for a non-recourse loan or not. While this may vary slightly from lender to lender, this serves as a good rule of thumb:
Houses need to be built after 1940. If you find a great pre-1940s home with a solid foundation and little need for renovation, you may still qualify.
Houses need to be at least $70,000.
You cannot live in this property, nor let anyone in your family or friends live in this property. You have to use it as an investment/rental property. It cannot be your primary residence.
A single unit in an apartment likely won’t work, because houses only qualify for a non-recourse if they have their own roof. Terraced (row) homes or any type of residence where you aren’t responsible for your roof won’t work.
What kind of rental property can I turn the house into?
The property can become a regular rental, such as for long-term tenants, or a vacation rental! Choosing the right avenue for renting should be based on the property’s location and the area’s need. For example, a house near a college town serves as a great rental property for students; a cottage in the mountains would be better as a vacation rental.
Are there any other financial qualifications?
Yes, though these will vary by lender. You will need:
- A good credit score (aim for at least 700, preferably higher)
- Proof of your self-directed IRA and a letter from your IRA account holder
- Income/expense statements, generally from the past two years
- A solid DSCR (debt service coverage ratio — it indicates how likely you are to profit from this investment), usually about 1.25
Again, these requirements aren’t the same for every lender, but they serve as a general idea.
Whether you’re breaking into the real estate investment world for the first time or are a seasoned vet, look through RealtyHive’s database to find your perfect property. From owning homes to owning rental properties, our time-limited events can help you find what you’re looking for.