NEW: BP Podcast 66: Flips, Apartments, & Protecting Yourself From Professional Tenants with Michael Blank

Hide this

From the BiggerPockets Blog

 BiggerPockets Blog »

Jump to Forum View All

Click a category below to view different forum categories.

BiggerPockets

General Info

BiggerPockets Q&A, Site Questions, & Announcements

1508 topics, 14381 posts — Last Post 04/17/14, 08:09PM

BiggerPockets Exclusive PRO Area

117 topics, 838 posts — Last Post 04/16/14, 09:08PM

New Member Introductions

10871 topics, 85479 posts — Last Post 04/18/14, 04:03AM

Real Estate Success Stories

394 topics, 6124 posts — Last Post 04/18/14, 03:29AM

General Real Estate

General Real Estate

Buying & Selling Real Estate

5924 topics, 46699 posts — Last Post 04/17/14, 11:53PM

Renters

643 topics, 5817 posts — Last Post 04/18/14, 01:07AM

Get Foreclosure Help - Help Stop Foreclosure Forum

316 topics, 2557 posts — Last Post 04/16/14, 03:58AM

Home Owner Association (HOA) Issues & Problems Forum

237 topics, 1609 posts — Last Post 04/17/14, 08:53AM

Do it Yourself

655 topics, 6262 posts — Last Post 04/18/14, 02:12AM

Reviews & Feedback

Real Estate Deal Analysis and Advice

3666 topics, 29393 posts — Last Post 04/18/14, 12:03AM

Real Estate Guru, Book & Course Reviews and Discussions

1132 topics, 11546 posts — Last Post 04/18/14, 03:57AM

Ask About A Real Estate Company

740 topics, 7312 posts — Last Post 04/17/14, 09:46PM

Real Estate Investing

Real Estate Strategies

Wholesaling

5591 topics, 43682 posts — Last Post 04/18/14, 02:55AM

Rehabbing and House Flipping

3328 topics, 30948 posts — Last Post 04/18/14, 04:17AM

Real Estate Development & New Home Construction

552 topics, 4679 posts — Last Post 04/17/14, 10:10PM

Innovative Strategies

703 topics, 6023 posts — Last Post 04/17/14, 09:46PM

Tax Liens, Notes, Paper, & Cash Flows Discussion

864 topics, 6667 posts — Last Post 04/17/14, 06:13PM

Rent to Own a.k.a. Lease Purchase, Lease Options

692 topics, 4870 posts — Last Post 04/18/14, 03:52AM

1031 Exchanges

143 topics, 1052 posts — Last Post 04/16/14, 05:39PM

Foreclosure Investing

General Foreclosure & Pre-Foreclosure Forums

1686 topics, 11285 posts — Last Post 04/17/14, 06:41PM

HUD, VA, and Tax Sales

414 topics, 3088 posts — Last Post 04/17/14, 07:35AM

REOs

1214 topics, 10570 posts — Last Post 04/17/14, 02:28PM

Short Sales

1534 topics, 13120 posts — Last Post 04/17/14, 04:44PM

Landlord & Tenant Forums

Landlord & Rental Property Questions

7193 topics, 70640 posts — Last Post 04/18/14, 03:18AM

Mobile Homes & Mobile Home Park Investing

638 topics, 5138 posts — Last Post 04/17/14, 11:01PM

Investor Basics

Starting Out

7689 topics, 60362 posts — Last Post 04/18/14, 03:59AM

Investor Psychology

430 topics, 6092 posts — Last Post 04/14/14, 06:53PM

General Real Estate Investing

4711 topics, 37163 posts — Last Post 04/17/14, 05:53PM

Real Estate Investor Marketing

1730 topics, 14091 posts — Last Post 04/17/14, 06:21PM

Commercial Real Estate

Commercial Real Estate Investing Forum

1409 topics, 8983 posts — Last Post 04/17/14, 06:13PM

Multi-Family and Apartment Investing

1106 topics, 9196 posts — Last Post 04/18/14, 03:22AM

The Business of Real Estate

Real Estate Technology and the Internet

Real Estate Technology, Social Media & Blogging

638 topics, 4884 posts — Last Post 04/17/14, 02:08PM

Business Basics

Goals, Business Plans & Entities

830 topics, 7549 posts — Last Post 04/17/14, 10:19PM

Real Estate Finance & Legal

Financial, Tax, and Legal

Tax, Legal Issues, Contracts, Self-Directed IRA

2784 topics, 19995 posts — Last Post 04/18/14, 01:13AM

Property Insurance

309 topics, 2045 posts — Last Post 04/17/14, 07:41PM

Personal Finance Discussion

328 topics, 2730 posts — Last Post 04/17/14, 04:56PM

Loans, Mortgages, Credit Lines

Private & Conventional Lending Discussion

2830 topics, 19679 posts — Last Post 04/18/14, 12:10AM

Creative Real Estate Financing

1207 topics, 8762 posts — Last Post 04/17/14, 03:35PM

Crowdfunding Real Estate

35 topics, 455 posts — Last Post 04/14/14, 02:14PM

Real Estate Professionals

Real Estate Professionals

Real Estate Agents

1206 topics, 7957 posts — Last Post 04/17/14, 09:20PM

Bankers, Lenders, and Mortgage Brokers

441 topics, 1919 posts — Last Post 04/17/14, 01:58PM

Contractors

268 topics, 1681 posts — Last Post 04/17/14, 10:53PM

Local Real Estate

Local Real Estate

Local Real Estate Networking & Recommendations

1984 topics, 11587 posts — Last Post 04/18/14, 03:58AM

Americans & International Real Estate

161 topics, 566 posts — Last Post 04/14/14, 11:19AM

Foreigners Buying in the USA

62 topics, 409 posts — Last Post 04/10/14, 06:27AM

Canadian Real Estate

64 topics, 427 posts — Last Post 04/17/14, 03:22PM

Marketplace

Real Estate Marketplace

Real Estate Marketplace

15004 topics, 53909 posts — Last Post 04/18/14, 03:00AM

Real Estate Events and Happenings

163 topics, 2483 posts — Last Post 04/18/14, 12:38AM

Off-Topic

Off Topic

Off-Topic

2902 topics, 32399 posts — Last Post 04/16/14, 03:07PM

Housing News & Real Estate Market

914 topics, 8351 posts — Last Post 04/17/14, 08:41AM

BiggerPockets Real Estate Investing Summit

97 topics, 1751 posts — Last Post 04/10/14, 02:27PM

BiggerPockets Resources

Forums » Starting Out » Can I refinance an investment property if it is already in an LLC?

Can I refinance an investment property if it is already in an LLC?

7 posts by 5 users

Signup


Hello,

My name is Brendan and I was reading some of your posts regarding LLCs and refinancing. I have a couple questions for you.

What I am doing is raising capital through private investors to pay for a 4 unit or less multi-family investment property. The reason I am raising the funds soley through investors is because I cannot carry the size of the loan on my own. Besides the point...

What I am trying to find out is what the process is, how difficult, and how much would it be to purchase a property for cash using investors money in the name of an LLC then 13 months from now refinance with a bank for a 30 year note.

The reasons I would be doing this is because if I do not receive funds through an LLC I am now opening myself up to a taxable event, which I cannot afford right off the bat. Secondly, I would be refinancing because the private investors note would balloon in 5 years.

What would the current interest rates be in relation to conventional/investment property rates. (I believe since the peroperty will be in an LLC that it is now considered commercial even though it is less than 5 units)?

Also, is it tough to refinance as an LLC?

If you have any insight on this I would appreciate any help thank you.

Brendan



SFR Investor · Wheat Ridge, Colorado


Hi Brendan and welcome to BiggerPockets.

I'm not clear on exactly what you're doing. Some thoughts below, but you really MUST find a good CPA and get some advice from someone who knows your personal situation. Depending on exactly what you're doing, you may need assistance from a lawyer, too.

If you are the one and only member of the LLC and you are getting investors to loan your LLC the money, then the taxes are exactly the same as if you borrowed the money directly. The investors make your LLC a loan. In 13 months (really, just over a year, I think) your LLC refinances the loan and pays off the investors. Refinancing a loan in an LLC will be a pain. You're likely to have to personally guarantee it, and personally qualify for the loan. You'll be getting a commercial loan, which is going to be at a higher rate and a shorter term than getting a conventional real estate loan. A balloon payment or at least a rate reset in five years or less is very likely. I strongly recommend you find a lender who will do this NOW and be sure you understand their requirements, LTVs, rates, and terms. Keep in mind that any lender you find right now may give this business up before a year passes.

If you have investors who are willing to finance you with a five year balloon and a rate under 10% you should make your deal work with them and plan to refinance shortly before the five year deadline. You might get a slightly better rate, but after you add in the refi costs, it won't be dramatically better.

I think you're looking at a rate of at least 7% for a commercial real estate loan to an LLC. A year from now, who knows. I would put the odds on the rate being higher at 99%. I would also assume you'll only get a 70% or lower LTV.

You say you "cannot carry the size of the loan". Hopefully that simply means your DTI won't pass scrutiny by a lender. Read in the Rental Property forum about true rental property expenses and make sure the deal supports itself. Commercial lenders look at the debt service coverage ratio or DSCR or something similar. That's the NOI divided by the debt payment. Lenders have various criteria, but its likely to need to be at least 1.2 or maybe higher. The lender will want to see actual number for the last year or maybe several. An ESTIMATE you can use for evaluating the deal is that the NOI will be 50% of the gross scheduled rent. Lenders commonly use 75% of the gross schedule rent minus the taxes and insurance. Their number might be slightly higher, but not much. Bottom line is you don't have a deal unless the rent is at least 2.5 times the expected payment.

If your investors are putting money into your LLC, i.e., buying units in your LLC, be sure you understand the securities law involved. You're "selling securities" at that point and subject to both federal and state securities laws.


Jon Holdman, Flying Phoenix LLC


Real Estate Investor · Baltimore, Maryland


Jon... fabulous post!




Originally posted by Jon Holdman:
Hi Brendan and welcome to BiggerPockets.

I'm not clear on exactly what you're doing. Some thoughts below, but you really MUST find a good CPA and get some advice from someone who knows your personal situation. Depending on exactly what you're doing, you may need assistance from a lawyer, too.

If you are the one and only member of the LLC and you are getting investors to loan your LLC the money, then the taxes are exactly the same as if you borrowed the money directly. The investors make your LLC a loan. In 13 months (really, just over a year, I think) your LLC refinances the loan and pays off the investors. Refinancing a loan in an LLC will be a pain. You're likely to have to personally guarantee it, and personally qualify for the loan. You'll be getting a commercial loan, which is going to be at a higher rate and a shorter term than getting a conventional real estate loan. A balloon payment or at least a rate reset in five years or less is very likely. I strongly recommend you find a lender who will do this NOW and be sure you understand their requirements, LTVs, rates, and terms. Keep in mind that any lender you find right now may give this business up before a year passes.

If you have investors who are willing to finance you with a five year balloon and a rate under 10% you should make your deal work with them and plan to refinance shortly before the five year deadline. You might get a slightly better rate, but after you add in the refi costs, it won't be dramatically better.

I think you're looking at a rate of at least 7% for a commercial real estate loan to an LLC. A year from now, who knows. I would put the odds on the rate being higher at 99%. I would also assume you'll only get a 70% or lower LTV.

You say you "cannot carry the size of the loan". Hopefully that simply means your DTI won't pass scrutiny by a lender. Read in the Rental Property forum about true rental property expenses and make sure the deal supports itself. Commercial lenders look at the debt service coverage ratio or DSCR or something similar. That's the NOI divided by the debt payment. Lenders have various criteria, but its likely to need to be at least 1.2 or maybe higher. The lender will want to see actual number for the last year or maybe several. An ESTIMATE you can use for evaluating the deal is that the NOI will be 50% of the gross scheduled rent. Lenders commonly use 75% of the gross schedule rent minus the taxes and insurance. Their number might be slightly higher, but not much. Bottom line is you don't have a deal unless the rent is at least 2.5 times the expected payment.

If your investors are putting money into your LLC, i.e., buying units in your LLC, be sure you understand the securities law involved. You're "selling securities" at that point and subject to both federal and state securities laws.

Jon, Thank you.

I would be going in the LLC with a partner, maybe smarter to go an LP route?? 6% to private investors in hopes to get an interest rate similar and less than the rate to private investors with a longer term, but that obviously could not be the case because of fluctuation of rates all the time.

So, I guess how do I get around being taxed on the contribution from investors if it is not going into a "company" and directly to myself? Would a limited partership give me more options?

Are the lending rules as stringent with an LP rather than going through an LLC?

Thanks.

Brendan O




SFR Investor · Wheat Ridge, Colorado


You really, really must get a good CPA to walk you through this. If you have one, fire him or her and find another one. I'm neither a lawyer or a CPA and you MUST have both for a deal like this.

The exact form of entity doesn't matter. The details vary and taxes are handled differently for different arrangements, but that affects the income produced by the company, not the money coming in.

I'm still not sure what you're trying to do. You say there's a partner involved and there are private investors involved. Please explain the role of each. I'm going to assume you and your partner going to create a company. The company will buy a property and the private investors will loan the company money for the property. But if that's not what you mean, please say what you do mean.

When someone loans you money, its not taxable. If someone invest money into your company, by buying shares in a corporation or member units in a LLC, that's not taxable either. If someone loans YOU money, that's not taxable. If someone gives you money, that's not taxable, either, though it may have consequences on their estate. So, I'm not sure why you are concerned about taxes, which is why I say you should fire your CPA if you have one.

Assuming the above arrangement, and that your investors are willing to lend you money at 6%, I'd keep that money as long as possible. You might get that rate personally if you have good credit, good income, and can get a conforming residential loan. Any other sort of loan right now is going to be at a higher rate. I'd be surprised if you can get anyone to loan you money at that rate, but certainly naive people with money do exist, and if you've found one who's willing to loan you money more power to you.

This is simple to set up. You and your partner form the LLC. In many states, that's 15 minutes and some chunk of change on the Secretary of State's web site. Then get an IRS EIN for your new LLC. Open a bank account. Put in enough cash to get the deal rolling. Make the offer. Line up the investor as a lender. Get all the paperwork to a title company. Close the deal. The LLC ends up with a deed from the seller. The LLC gives the lender (the investor) a deed of trust (or mortgage, if that's what your state does) and a promissory note. The seller gets the money. The only taxes owed are owed by the seller.

If there are multiple investors, the best approach is for them to form their own LLC. They would put their money into that LLC, and then that LLC would loan your LLC the money. That LLC is not your problem, and you're not involved in its setup.

Do spend some time on the operating agreement for your LLC. You and your partner need to work out ever little detail while you're friends so the decisions about what to do when things get rocky are in writing. Consider all the possibilities like the LLC needing more money, one of you needing money, one of you dying, getting sued and losing or getting divorced. Then, take your notes or draft operating agreement to a lawyer who deals with this sort of thing and get their input.

If you are thinking you will get investors to put money directly into your LLC, that is, buy units of the LLC, you MUST get a lawyer. If you, your partner, and these investors are all members of the company, you must have rock solid documentation and operating agreements. It would be best to do proper Regulation D securities filings. If there are just three or four of you and you all know each other intimately, then maybe you can just do a solid operating agreement with an attorney. This is NOT a DIY project. If even one of the investors is someone you just know casually, then you really MUST do those Regulation D filings. Plan on $20K or so to do those filings and all the legal work. The loan is much simpler and cheaper. This only makes sense if you're talking about raising a million bucks or more.

If you're going out to get investments from strangers, then you need to do an IPO - initial public offering. Plan on a million bucks to do that. The Reg D filing will set you up to raise money from people you know, but not strangers.

If I've misunderstood what you mean, and I probably have, straighten me out and I'll try to give better advice.

The best advice remains, though, get a good CPA and a good lawyer.


Jon Holdman, Flying Phoenix LLC


Real Estate Investor · Phoenix, Arizona


Jon's posts are great. If your investors and you are all investing in the LLC at startup time, then you will most likely get a safe harbor as co-incorporators and not need to worry about the securities laws aspect of things. But if you and your partner set up the LLC initially, and then sell membership interests to the investors, then you need to worry about creating a prospectus, etc. which is expensive, as Jon said. It will probably cost you around $10,000 or so. But if the investors are accredited, then you should be able to get away with it for a much lower cost.

BTW, for a four-plex, I would not really do a separate LLC for each investor. If they are just lenders, then do the loan and deed of trust as Jon said. If they are going to be members of the LLC, do the operating agreement through a lawyer as Jon said and make sure they are founders of the LLC at the time of setup and don't come in later.

If there are multiple investors investing in a 4-plex, they may wish to form one LLC of their own that does the lending. In my opinion, the more complex you make this, the less likely it is to be worth doing it.

The ideal advisor for this transaction would be a securities and corporate lawyer who does RE deals. Those guys are very familiar with the tax and securities aspects of things.




It is difficult to finance in an LLC because you have to get commercial financing (higher rates etc.) and likely must have a personal guarantee anyways.

So is thought then, if your investing in commercial assets, use an LLC.

If your buying less than 4 1-4 family properties then keep them in your own name.

I believe that is the general rule?





Sign up