LLC's and Financing
Rookie question time. So, I have been poking around this site for a while and decided to sign up, because I cannot get my head wrapped around something. I understand how LLC's can benefit/insulate an investor if structered properly. In my area almost every bank/credit union/etc specifically states they will not lend money to an LLC. So, why even bother? It seems the financial system is structered (largely) to defeat this type of setup.
your not talking to the right banks and/or the right people at the banks. Call the smaller local banks and ask for their small business lending department..
Specifically ask if you are a portfolio lender, or if that goes over their head as that you are looking for a mortgage bank that does not resell the note to Fanny/Freddie. Basically a bank that holds their own notes. In the end they will look at the specifics of the property as in if it appraises and then you as what is your debt to income. There maybe other things but this is typically what they look for in lending to LLC/Business.
When most newbies get into the business, what is of the essence to them is understandably SAFETY - as it should be. Safety, in a lot of ways is a function of the underlying financing. Simply put, you want a vanilla 30-year Fannie-Freddie conforming note - correct?
The problem is that these are specifically designated as "home owner" mortgages - both GSEs were set up to perpetuate home ownership. As such, the entity on the note and mortgage has to be a human being and can not be an LLC, which is a corporate entity.
Now - you'll see suggestion here and everywhere to close in your own name (so that you can get the mortgage in your own name) and then transfer the property into LLC. The problem with that is that your mortgage will have Acceleration Clause and Due on Sale Clause which allows the bank to accelerate repayment of the note should any portion of interest in property be transferred. Thus, if you do this you either hope the bank won't find out, or you don't care because you've got money in the bank with which to cash out the note should the bank call it due.
Otherwise, if it is important to you to use LLC, then you must play in the commercial space, where unfortunately ams are shorter, interests are higher, and arm and balloons are the flavor of the day.
Which will it be?
Hope this helps.
Thanks for the responses. I tend to play a little more on the conservative side when it comes to investing (stocks/bonds). Since I am new to this type, I will maintain my conservative approach for now. I am looking for "vanilla" 30 year standard financing to get going on my first property. I think for now I will stick with the traditional route. Getting a normal mortgage will be easy with my credit score and income. As I go further into the journey I will explore the local banks and portfolio lenders more to pursue the LLC option if needed.
In my opinion, LLC's are oversold to small real estate investors. A good insurance program with high limits is much more cost effective and easier to deal with than setting up and running LLC's.
On the other hand, if you're borrowing from a private lender (hml/pml), the reverse is true, the borrower must be an entity. So it depends on your investing goals. If you intend buy and hold, you want a conventional lender (borrower must be natural person), if you intend fix and flip, you want a private lender (borrower must be an entity). Of course there are always exceptions to any rule, but this is more the norm. Short term loans from conventional lenders are hard to find, conversely, long term loans from private lenders are hard to find.
Definitely a buy and hold passive income strategy for me.
Originally posted by @Bryan N.:
Definitely a buy and hold passive income strategy for me.
If that is the case, then you may also run into another common problem with loans from larger banks that resell to Fannie and Freddie - limits on the number of mortgages.
Some very good advice has been given already. Don't be too quick to dismiss LLC's or the complexities. They are definitely not rocket science. Everything I own, except my personal residence, is owned by an LLC that I control and they all have mortgages from smaller local banks that do portfolio lending OR they have seller-held mortgages.
In my opinion, 30-year mortgages are more risky than shorter term mortgages. Why? Because it is easier for you to talk yourself into overpaying for the property due to a lower monthly payment. Personally, I like 10-15 year mortgages that pay down faster. What happens if I decide in 4 years that I either can't or don't want to own the property anymore? On a shorter term note, I would have paid down more principal as well as recovering all of my closing costs simply through loan amortization over those 4 years. On a 30 year note, you are lucky to recover JUST your closing costs in 4-6 years!
Think of asset protection like layers of an onion, you want more than one layer in your onion! If you were flying on a plane at altitude, wouldn't you want more than one way to protect yourself if things started to go wrong? Fire extinguishers, safety fuel cells and if all else fails, a parachute? I like the high limit insurance coverage alongside LLC or similar protection, not just one or the other.
I highly recommend you push your comfort zone a little bit and explore by talking to smaller lenders. Your business/investments will grow faster and more securely if you do. The GSE's are around to support homeownership primarily. You are an investor, not a homeowner.
I am definitely not dismissing LLC's. I completely agree on the 30 year mortgage point. I am pretty disciplined when it comes to numbers (I learned the hard way many times in the market) and the numbers tell the truth or they don't. I LOVE 15 year mortgages and completely agree with the paying down the principal. My current house is on a 15 year and I will never go back to a 30. I also completely agree with asset protection is like layers of an onion. I have always applied that philosophy to my stock/bond investments and it has served me well. Tomorrow I am meeting with my realtor who I have used for many years. We are going to discuss short and long term goals and formulate a plan from there. Believe me, I am not discounting any if the info given out here. I am merely soaking it up like a sponge.