Investing in real estate is a fantastic way to build wealth. However, understanding the financial commitments involved is essential, especially regarding the types of debt you might take on. One benefit of investing in DST is that investors can take advantage of the existing debt the sponsors procured without qualifying for the loan. However, it is important to break down the critical differences between recourse and non-recourse debt so you can make informed decisions and mitigate your risk. This isn't about scaring you; it's about equipping you with the knowledge to handle risk effectively.
The Basics of Recourse Debt
Understanding Recourse Debt
Recourse debt allows the lender to seize not only the collateral (the property) but also other assets you own if you default on loan payments. Essentially, the lender has a "recourse" beyond the asset itself, which could include your personal savings, other real estate, or even future earnings.
Recourse debt is common in residential and commercial mortgages. For instance, if you default on your home loan, the bank can foreclose on your house and pursue additional assets if the property sale doesn’t cover the outstanding loan balance.
The major risk with recourse debt is that you could lose more than just the property tied to the loan. If the real estate market is downturned, you might find yourself owing more than the property's worth, leading to severe financial consequences.
The Basics of Non-Recourse Debt
Understanding Non-Recourse Debt
Non-recourse debt limits the lender's recovery to the collateral specified in the loan agreement. If you default, the lender can only take the property linked to the loan, not your personal assets.
Examples of Non-Recourse Debt
Non-recourse loans are often used in commercial real estate and certain investment properties. For instance, if you invest in a multi-family apartment complex with a non-recourse loan and default, the lender can only seize the complex itself.
Benefits and Security
One of the main benefits of non-recourse debt is that it provides a safety net for your other assets. This type of loan is particularly appealing to investors since it mitigates personal financial risk.
What Happens in Foreclosure?
Foreclosure Process
Foreclosure occurs when you fail to make loan payments, and the lender takes control of the property. This process can be lengthy and complicated in both recourse and non-recourse loans.
With recourse debt, if the sale of the foreclosed property doesn’t cover the outstanding loan balance, the lender can pursue a deficiency judgment against you to recover the remaining amount from your other assets.
In the case of non-recourse debt, the lender’s recovery stops at the property. They cannot go after your other assets, making foreclosure less financially devastating.
DSTs and Debt
A Delaware Statutory Trust (DST) allows you to invest in real estate passively. DSTs pool funds from multiple investors to purchase larger properties, such as commercial buildings or multi-family units.
One benefit DSTs offer is that properties with debt are typically non-recourse. By mitigating the risks associated with traditional real estate financing, DSTs provide a safer way to grow your net worth by minimizing any spillover risk potential.
Investing in a DST can help diversify your holdings across different properties and locations, reducing the impact of a single investment’s failure. The non-recourse nature of DST debt adds an extra layer of security for your personal assets.
Conclusion
Understanding the differences between recourse and non-recourse debt is crucial for anyone investing in syndicated real estate investments. Non-recourse loans provide greater asset protection potential. Knowing these distinctions allows you to make more informed decisions, protect your personal assets, and confidently grow your real estate portfolio. If you're ready to take the next step, consider diversifying your real estate holdings with non-recourse debt options like DSTs.
Please contact us for more information on this topic!
This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation. Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.