Is a non-recourse loan needed in an LLC that only has 1 asset?

Question

Hey guys,

So this has been a bit confusing for me, but assume I have an LLC that has nothing (0) inside of it. Should I try and get a non-recourse loan, if the loan & property is going to be under the LLC?

Is that just pointless because I'd only have one property in the LLC and if things go bust they couldn't come after me personally anyways because it's in the LLC's name, right? And getting a non-recourse wouldn't that possibly increase the interest rate they give me?

Mark Nolan · Answer

@Adam Yunker

Is the member of the LLC an IRA?

Michael Fischbach · Answer

@ Adam Yunker  Adam, You wouldnt want to put each property under an LLC as that adds a yearly cost to your bottom line for each property for both filing fee's and a monster tax bill from multiple entity's.  It would be far cheaper if you simply went with (example) Adam Yunker D/B/A Yunker Properties with all properties under an Umbrella Policy.  Believe me the fee to file one DBA in your county is far cheaper and when it comes to taxes is far easier for an accountant provided you keep very good records.  I think one of the questions you may be looking to answer would be "Quit Claim" which presents some problems in its own.   If you get out from under the hypothetical and get into this in a real way, know that you can get commercial loan's on residential property when the Corporation is doing the buying.  But then again, it will come down to the financials of your Corporation!

Adam Yunker · Answer

First off, this entire thing was all theoretical to help clear up a question I had about LLC's and bank loans. I am planning to my first property under my name with liability insurance. I wasn't sure about the "umbrella" tax strategy where you had an S-Corp and underneath you have a bunch of LLC's with a different property in each LLC and I assumed they would go to the bank when already made the LLC and get it under it's name with no other assets and if they would get a non-recourse loan if they did that. However, now I guess (I don't know, but I would have to guess) the bank either makes the loan on the S-Corp (that already has the credit and profits) or has the loan guaranteed by the S-Corp, or something like that. I just wanted to know how bigger more established companies do it, if they go and create an LLC and try to get a loan in a new LLC when it has no assets in it.. Now I know that is wrong, but coming from that perspective I wanted to know if in that case would having a recourse loan even matter, but now I get that it wouldn't come down to the newly made LLC the bank would probably look at the financials of the S-Corp holding it. Or maybe they don't make the seperate LLC until the loan is paid off and then afterwards the create the LLC and transfer the property into their or something like that.

Michael Fischbach · Answer

@Mark Nolan  From his questions and apparent age of 18 I doubt he has an IRA capable of buying property Mark.  Although that is one way for people that may be getting close to retirement to be able to invest in real estate property, self financing and eliminating the banks altogether.  You are the first person I've seen actually bring up the IRA funded LLC even though it adds UBIT taxing!  A few people I know are currently doing just that and are in their mid 50's.  Great point though Mark for anyone that may look at this thread!

Jeff B. · Answer

Getting financing for an LLC  property purchase is difficult.  You will need to take it personally with recourse because the LLC has no income and thus no credit.

Let's say you jump that hurtle and now want a second property, surely things change?  NOPE.

The income is two small to cover both the first and second properties at the same time; just like the personal DTI problem.

The PnL for the LLC (or  any other legal entity) will need to justify the new loan.

Michael Fischbach · Answer

Adam, you need to do a lot more reading about LLC's.   If you have no assets in an LLC  why would a bank ever loan the money and I have never seen a bank make that type of loan to anyone without business experience and no assets!     In fact I'd suggest you do a lil reading about SMLLC's and the legal recourses that can be taken by debtors especially how it relates to LLC's in IL. As far as your interest rate goes thats going to depend on if you are buying it or your LLC is buying it.  If your LLC has no assets that means you have zero credit!  You also cant buy something under your own name and just transfer to your LLC unless its been paid in full.  As far as the non-recourse loan goes I doubt you'd ever get one unless you ultimately are buying it 25 to 35% below market/appraised value!  Lastly, do some reading into getting credit for your LLC

Is a non-recourse loan needed in an LLC that only has 1 asset?

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