Create a property management company, put it on the lease

6 Replies

I'm sure other investors run into this problem as well...

I was going to create an LLC a couple months ago until I found 99% of banks wont lend to LLC, great. So I purchased my 2nd rental under my name again. And even if a bank will lend to an LLC the terms are usually not as attractive.

Here is my thought- What if I create a property management company, and put the contract in binding of "property management and resident"? Is this legal? That way if anyone wanted to sue, it wouldn't be directed toward me.

Antonio

Banks will lend to an LLC. If it's a new LLC having done no business, the bank is just going to have you sign a personal guarantee on the loan. This is no different than taking a loan out when the property is in your name.

The rate is more for an investment property as opposed to personal residence. Unless you are telling the bank the property is for personal residence, the rate should be the same whether or not it's in an LLC or it's in your name.

Did you just "hear" that banks don't lend on LLC, or did you actually speak with several banks? I had no problems getting a loan on my newly started LLC, and had 2 banks tell me that it's not a problem.

As for your idea, this is my opinion (not an attorney).  I'd say it doesn't pass the "sniff" test.  If you are titled on the property, and you are the principal in your property mng company, and your company only manages your own properties, and you construct a legal document that no other normal property mng company would construct (basically the company is completely liable for anything in related to the property), then it would seem to me that this is pretty easy to "pierce the veil" of the property mng company as the property mng company is not a true "company".  

@Daniel Chang

I am thinking of doing a series LLC with my partner, what sort of rates (loan that is) does a new LLC get? E.g.: Does the bank look at the credit of the owners?

Or, did you open up some credit lines with the LLC first?

Thanks,

Alice

@Alice K.

I noted you were from CA. Be careful with series LLC in other states when you live in CA. CA is ridiculous in their rules. If you are an active member/manager of an LLC in another state that holds property in another state, CA will consider you "doing business" in CA because you live in CA, and will expect you to pay the $800 franchise tax fee. As for series LLC, CA's position is that each "series" is treated as a separate LLC in CA, and hence if you have 5 series, it could amount to 5x $800 = $4000 in franchise tax payments. I believe this is not an issue if you are a passive investor (not manager of LLC).

As for your loan question, I deal with commercial properties, and so the lender looks first at the cash flow of the property can meet the loan obligations (debt coverage ratio).  They do secondarily look at the individual's income and credit score, but mainly it's the income producing property that matters most.

Now if you are looking to be SFR, I'm not sure how a lender would evaluate that. My guess is that they care more about your individiual income and credit as SFR are not considered income properties (although they can be).

@Antonio Esquivel -your attempts at protecting yourself show that you are thinking the right way. You absolutely want to ensure that you cover yourself against any potential liability. The decision to create an LLC, in my opinion, comes down to your current/projected financial future.

Scenario #1: You are buying your first investment property at $250,000 and secure a loan of $225,000 - you don't really have much skin in the game. Regular insurance will likely cover you.

Scenario #2: You already have three investment properties paid off and cash flowing. Your investments are worth a substantial amount of money and you are getting concerned about your personal liability - maybe its time for umbrella insurance or an LLC. But beware, its not as simple as creating an LLC - you can't mix personal and business money. Once you do, you effectively remove the protection of the LLC (I am not at attorney or tax advisor, but this is my understanding of how LLCs work).

Additionally, @Daniel Chang has a great point. Some states are far more complicated (and expensive) than others. CA is a great example of a very expensive and complicated state with regards to LLCs.

This post has been removed.

Originally posted by @Daniel Chang :

Antonio

Banks will lend to an LLC. If it's a new LLC having done no business, the bank is just going to have you sign a personal guarantee on the loan. This is no different than taking a loan out when the property is in your name.

The rate is more for an investment property as opposed to personal residence. Unless you are telling the bank the property is for personal residence, the rate should be the same whether or not it's in an LLC or it's in your name.

Did you just "hear" that banks don't lend on LLC, or did you actually speak with several banks? I had no problems getting a loan on my newly started LLC, and had 2 banks tell me that it's not a problem.

As for your idea, this is my opinion (not an attorney).  I'd say it doesn't pass the "sniff" test.  If you are titled on the property, and you are the principal in your property mng company, and your company only manages your own properties, and you construct a legal document that no other normal property mng company would construct (basically the company is completely liable for anything in related to the property), then it would seem to me that this is pretty easy to "pierce the veil" of the property mng company as the property mng company is not a true "company".  

No I didnt "hear" I actually tried and no banks would lend to an LLC. Yes I know personal residence is cheaper. Thanks for your advice.

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