Get a loan from your LLC and protect your asset at the same time?

Here is something I'd like to hear (read...) your opinion about.
It was brought to my attention by a member of BP and it seems like a wonderful idea. . Lets say that you bought a property using cash and now it's free and clear, You would like to rehab it and then rent it out, but you also like to get a conventional loan after you're done with your rehab. There is a way around the "cash out" hurdle. You create a corporation or an LLC. Then, that entity creates a loan document and a note lending you the money which is equivalent to 65% of the estimated ARV. You record that note (Very important)
After you are done with the rehab, and you waited the seasoning period, you can go to a local, friendly bank and apply for a rate and terms refinance. Since this is no longer a "cash out" loan, the bank is "protected" by paying off the existing loan.

Now here is possible an added value to creating such note even if you don't think about refinance. If you don't want to transfer the property to an LLC, Corp. or such, it seems to me that it would give you a layer of asset protection since the property has a lien against it already.

Please, give me your thoughts and your challenges.

Edited: 06/26/2010 at 09:04AM

Will Barnard

Rehabber · Santa Clarita, California

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Icon_minipost Jul 22 '09, 12:58 PM

Eddie,
I think that is a viable and creative strategy. There are many uses for an LLC, not just a layer of asset protection and you have pinpointed one of many. I have not personally done that strategy as all my long term buy and holds were done with some other type of creative financing or conventional financing upon purchase, but I see nothing wrong with the strategy.

The only possible curve ball you may need to watch out for is that the LLC that holds the note. If it is the same owner as the subject property, I could see a lender (in these new days of lending BS and crap criterias) having a problem with it.

How about we have some lenders chime in here!

Edited: 06/26/2010 at 09:04AM

Will Barnard, Barnard Enterprises, Inc.
E-Mail: info@barnardenterprises.com
Website: http://www.barnardenterprises.com
info@barnardenterprises.com

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Icon_minipost Jul 23 '09, 04:48 AM

Eddie,

So your LLC creates a note for 65% of ARV but no funds are actually provided my the LLC? Wouldn't the local, friendly bank ask about this? Wouldn't they want to know who they are sending that check to?

Edited: 06/26/2010 at 09:05AM

Eddie Ziv

Real Estate Investor · Studio City, California

1803 posts
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Icon_minipost Jul 23 '09, 05:39 AM

I'm not sure if I understood your question. The LLC is a registered company with the state and is in good standing. The loan /note is recorded properly so the debt has been established with a lien against the property. The bank furnish the funds to the debt holder i.e. the LLC.
The only issue that is at hand is whether or not the estimated ARV is right. If the bank appraises the property, and it comes short, the borrowed amount may not cover the debt to the LLC, but that another issue.

Edited: 06/26/2010 at 09:05AM