Differences Between Recourse and Non-Recourse Debt In Real Estate Investing
One of the biggest questions for new real estate investors is “where will I get the money to invest in real estate?” Buying investment properties is not cheap, a property purchase could be several hundred thousand dollars to multiple millions of dollars depending on the market, size and class of the investment property you are purchasing.
Fortunately, you don’t need to have all the money to be able to make an investment in quality real estate, such as multifamily apartments. If you want to invest passively and just receive returns on your money, then you can use syndication to join in with a group of other investors and pool your money together to invest. If you are an active investor, then there is onus on you to help secure all the money needed to make the investment purchase. Note that I didn’t say you needed to have all the money but rather you need to secure it. Via syndication you can help organize investors together to provide the funds (also known as equity) to make the purchase. (If you need a primer on the overall syndication cycle check here.)
One of the benefits of real estate is that you don’t have to get all the money from investors, but you can get around 70-90%+ of the funds you need from a bank or other type of lending institution in the form of debt. This mix of cash from investors and from lending institutions will make up the capital stack for the investment opportunity. Both passive and active investors need a good understanding of the capital stack to help vet the merits of the deal they are going to invest in.
In this article we are going to explore more about debt. Specifically, the differences between recourse and non-recourse debt.