BiggerPockets

I just read a very good blog article of relevance to the discussion about LLCs. Take a few minutes and check out:

Why You Should Consider Forming an LLC for Real Estate Investing

Thanks to Will for the article.

Any thoughts, folks?

Originally posted by "biggerpo"

Any thoughts, folks?

(From the article)
" Owning property as an individual creates unlimited liability."

:wowo:
(While I already knew that, seeing it put so starkly in print really
drives the point home).

Ned is correct that it is difficult to finance properties in an LLC. That is why you either don't ever deal with financing and do lease options, subject-to, wholesaling........or you get the loan in your own name and then put it into your LLC 60 days later.

Originally posted by "Primo_Coach"

Ned is correct that it is difficult to finance properties in an LLC. That is why you either don't ever deal with financing and do lease options, subject-to, wholesaling........or you get the loan in your own name and then put it into your LLC 60 days later.

Incorrect!
First, not everyone wants to do lease options, subject-to, wholesaling and second, you do not need to wait 60 days to transfer the title into the entity. I have had the title company file the doc on the same day I closed on the property and it was recorded simultaneously.

As far as approval difficulty on loans, you are required to personally guarantee the loan, so there is no more of an issue than if you do not use an entity. (unless of course your entity has credit history/worthiness in which case the loan would be determined on those levels)

Case in point from a person in the lending business:

You need to do a personal guarantee on the loan, then move it in. I don't know any lender with the exception of Credit Suisse that will do it any other way.

Interesting article Here are some questions:

1) If a property is paid for, and I deed it to an LLC, is it much of a problem to get refinancing using the property as collateral, even though it is now owned by the LLC?

2) The article recommends utilizing multiple LLCs, one for each property. Does anyone utilize this strategy? And is the article correct in stating that if banks loan on the property in the LLC, that they don't want more than one property in that LLC?

3) In another source I read, the author recommended that you put enough properties in each LLC to total $200,000 - $300,000 and pursue a commercial loan using those properties. Any pros and/or cons to that strategy?

Thanks. I'll be back in three minutes for your answers.....

I think Nationwidepi did a good job of explaining this issue and I agree with him.

I buy all of my properties directly into my LLCs. I personally guarantee the loans. Of course, I always get commercial loans because I'm involved in a commercial enterprise. I bought 11 rentals in January, with 100% financing of the purchase price but at a very low LTV. I believe the interest rate was 7%, which isn't a lot more than a residental lease for a non-owner occupied property. As I recall, there were two loans. My properties are divided into LLCs according to risk. My highest risk, lowest income apartment buildings are owned by land trusts with LLCs as the beneficial interest. The rest are owned directly by LLCs. I generally have 8-12 rentals in each LLC, considering the dollar amount of the risk as Nationwide said.

It would be an absolute nightmare to have each property in its own LLC. With several dozen checkbooks, several dozen tax returns, several dozen filing systems, it would be an endless amount of work and a lot of extra cost. I try to strike a balance between security and practicality.

Good Luck,

Mike

I wrote

The only thing I would add is one the of negatives is it can be harder to finance property held in an LLC.

Since I was the first to comment on it being harder to finance LLCs let me clarify; It is not really harder to get LLC financing but it is different. As Mike OH said commercial financing is done for LLCs all the time.

The problem is many new investors go to residential lenders or mortgage brokers who are used to dealing with homeowners. They will swear up and down they can get you financed. However most of their lenders will not have programs for LLCs.

Nationwidepi wrote

As far as approval difficulty on loans, you are required to personally guarantee the loan, so there is no more of an issue than if you do not use an entity.

That is true IF you are at the right lender. This may have changed, but the government backed secondary mortgage market does not buy loans from LLCs. Their charter is to get more homeowners not more landlords. This is the reason that LLC loans are harder to get, (or should I say different)

The solution
1) Go to the commercial dept of a bank or other lender. Local portfolio lenders are a great choice. These are lenders that hold their own loans and can be more flexible on underwriting guidlines. They do not have to follow the guidlines of the secondary market.
2) Go to a mortgage broker who actually does LLC loans. Make sure they actually do thes loans.
3) Do creative deals as Jason Hansen says

When you buy a property, tell the banker you want to put it in the name of your LLC and you wish to be the personal guarantor on the loan. If they don't know what you are talking about, then they are an incompetent tool. Ask for somebody else in the department to handle the loan instead who has some seasoning about themselves....

When you are at the closing table, you will sign the paperwork as yourself as a 'member' of the LLC....

The properties that I want to transfer to my LLC are properties that I have owned for several years in my name. My new rentals are going into LLC's, but these are properties that I put in my name before I knew any better. So what I'm reading is that they already have my personal guarantee in the form of the mortgage, and all I need to do is file a quit claim deed and there should be no problems

JMac

For me I am a beginner at this real estate game but I am planning to purchase a property and make it into my first rental. The question is for me how and where can I form a L.L.C. and what are the postive outcome for a person like me who is just starting?

How do I get approve for mortage with a LLC open up ?