Real Estate Investing Basics

Here’s How You Fund a Deal—Before Creating That LLC

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Many real estate investors, particularly those who follow a buy-and-hold strategy, use LLCs to help protect and manage their investment properties. Once an LLC is established, investors can purchase, borrow, and manage their properties through the LLC. The primary reason investors use LLCs is to protect their assets and limit their personal liability in the event a lawsuit is filed in relation to one of their properties.

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In addition to limiting liability, there are other advantages to using LLCs, including everything from ease of administration to tax benefits. A potential drawback to LLCs is more restrictive borrowing opportunities. When it comes to borrowing through an LLC, lenders look at and treat loans to LLCs a bit differently than they do to individuals.

How LLCs Are Treated Differently

The biggest difference when borrowing through an LLC is that you won’t be able to obtain government-backed loans (e.g., FHA, VA, etc.) to purchase investment properties. Why? Government-backed mortgage loans are generally intended to help consumers purchase their primary residence, not investment property.

If you hold an investment property in your personal name (not via an LLC) you may be able to get a "conforming" loan (Fannie Mae and Freddie Mac) on your property. But there are limitations to the numbers of properties you can finance via this route.

Although you won't be able to obtain a government-backed or conforming loan for investment properties through your LLC, you still can get a loan through conventional lenders. Just be prepared to personally guarantee the loan and submit a lot of paperwork. Why? A newly formed LLC lacks established credit and a history of income.

Therefore, the lender will look at your personal credit and income history to qualify your business (LLC) for a loan, and require that you sign a personal guarantee. In this case, the LLC gives you protection from liability, but you are personally on the hook for the loan.

Related: A Step-by-Step Guide to Set Up Your LLC (With Video!)

Other Borrowing Options

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You may find trying to go the conventional lender route is just too unpleasant with all the paperwork and personal guarantee requirement. If so, here are a few options for borrowing through your LLC.

Commercial/Portfolio Lender

Assuming the numbers on the deal are solid, you may be able to get a loan through a commercial/portfolio lender. Most commercial/portfolio lenders will still want a personal guarantee on the loan, especially when the business entity has no established credit. However, they may have some flexibility and be willing to work with you if you have a track record of successful deals or you are willing to buy down the loan.

Sometimes an investment property, like in commercial lending situations, will be enough if it has good enough cash flow and signed leases by tenants prior to getting the loan.

Hard Money Lenders

Yes, rates are likely to be higher than conventional loans, but the terms will likely be more flexible as hard money lenders focus more on the collateral property itself than on the borrower.

Tips for Borrowing Through an LLC

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Regardless of who you ultimately borrow from, it is a smart move to take steps as early as possible to establish a proven track record and solid credit history for your LLC. The sooner you do this, the sooner you can get out from under the personal guarantee requirement. Some of the ways you can build credit and a proven track record for your LLC are as follows:

  • Establish credit lines that will grow with the LLC. Starting out you’ll have to use your or the LLC officer’s credit to gain approval under the business name. But this can build credit for your LLC if you’re using the EIN or corporate tax number.
  • Put a free and clear property into your LLC to give the LLC some assets. This allows the LLC to have some
    LLC-owned collateral to secure loans to. This strategy does put that property at risk, but if you are a responsible borrower the risk of losing that property will be very low.

Related: No Credit? Bad Credit? 6 Steps to Fix Your Finances

Conclusion

If you plan to borrow through your LLC, be sure to know the requirements and, if possible, establish a credit history and proven track record before you need the loan.

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What has your experience been like investing through an LLC? What advice would you add?

Share with a comment below!

Ian Colville is the Managing Partner of CCM Finance. Ian is a native of Minnesota (born in Rochester). He brings both a formal education (BA in Economics and MBA) as well as industry experience to ...
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    Jim Walker Real Estate Agent from Roseville, California
    Replied about 1 month ago
    I looked into the cost of incorporating as an LLC, not bad, a few hundred dollars to set up. But that was just going to be a one time cost. Then I found that the minimum yearly CA state tax for an LLC would be $800 per year, regardless of profit. Every year. Then I was led to believe that a single owner or family LLC corporate veil is easier for a competent lawyer to pierce than the crust of a delicious pumpkin pie. I opted instead for an umbrella policy. Twelve years later, still no lawsuits. I've wasted $3000+ on unnecessary (in hindsight) insurance premiums. On the bright side, I saved $10,000+ on unnecessary (in hindsight) LLC expenses. Curiously, the premiums have nearly doubled with no change in coverage. That is beginning to tick me off, but I know I can't just drop umbrella and hope that a magic LLC is going to protect me from either a frivoulous lawsuit, or a merited case. Btw, despite the umbrage an investor might feel about a frivolous case, at least it's usually beatable. My worst fear is a merited case. So I spend money keeping my properties safe and up to code. It is the best money you can spend to keep from getting sued.
    Nicole F.
    Replied about 1 month ago
    Also, to add insult to injury, if a CA resident sets up an LLC in a state other than CA (say for buying rentals in TX), they would still need to register the LLC in CA and pay the $800 every year. Even though the LLC does no business in CA. Think CA is the only state with that requirement
    M. Ian Colville Lender from Minneapolis, MN
    Replied about 1 month ago
    Interesting. Annual fees in Minnesota are tiny competed to California it seems. Keeping umbrella policy is a good idea regardless of whether or not you have an LLC. I've found that the biggest benefit of having insurance is that THEIR lawyers deal with the hassle of any claims (frivolous or merited). Not having to hire a lawyer to defend against any claims is a big stress reliever.
    Paul Taliefero
    Replied about 1 month ago
    If you're starting out with poor credit, what happens with the LLC's credit?
    M. Ian Colville Lender from Minneapolis, MN
    Replied about 1 month ago
    At the size/scale that most of us operate at the credit rating of LLC is immaterial as bank will always look at the credit score of owners of the LLC. Only once an LLC has been around for several years and owns considerable assets might a lender consider ignoring the credit of the owners of the LLC.
    John S Lewis from Jackson, NJ
    Replied about 1 month ago
    @M. Ian Colville - forgive my ignorance, but how does one apply for credit with the LLC using the owners info?
    M. Ian Colville Lender from Minneapolis, MN
    Replied about 1 month ago
    @John - No problem. Most common way is to talk to the "commercial" loan department of a local bank. Banker will collect information on the project, the LLC and on the owners of the LLC. This almost always includes running a credit check on the owners of the LLC and then requiring a "personal guarantee" on any loan to the LLC from the owners of the LLC. Does this answer your question?
    Jay S. Rental Property Investor from Los Angeles, CA
    Replied about 1 month ago
    You can always get unsecured business line of credit.
    Jay S. Rental Property Investor from Los Angeles, CA
    Replied about 1 month ago
    On a side note I totally disagree that LLC can do truly protect asset but it does limit the damage. The true way of asset protection is by stripping the equity of property, which can be done regardless of property under LLC or under one's name.
    Nick S Koval Rental Property Investor from Columbia, MO
    Replied about 1 month ago
    How do you strip equity off property?
    Ika Sargeant Real Estate Agent from Reston, VA
    Replied about 1 month ago
    I financed a property using an LLC in Virginia but now I am looking at getting another property but I am having a hard time finding lenders. Could someone share a link where you could find credible lenders especially commercial lenders who are not focusing on million plus deals. On the issue of cost for LLC, I have incorporated in a state with little yearly costs. However I still have an umbrella policy because the cost is very minimal. I would also suggest know the rules for the state where you are doing business especially rentals and operate within the law.
    Blair Ellis from Greenville, SC
    Replied about 1 month ago
    Jay S. Care to elaborate on your meaning? It's slightly ambiguous to what you mean. Not sure if that was your intent or not.