Financing options through a Trust

36 Replies

Hi everyone! I have a question regarding financing options, my apologies if this has been answered somewhere, but I haven't been able to find an answer for it. On the advice of my attorney, I am considering purchasing my buy-and-hold properties through trusts, rather than through individual LLCs like other investors in this area do. I know that I would need to get a commercial loan to buy through an LLC, but what about a trust? I am located in Massachusetts, as are my target properties, and have not yet figured out exactly what type of trust to use. In an ideal world, I'd like to get conventional mortgages because of the better financing terms. Is this possible with a trust? And if so, does anyone have any lender recommendations that would do this? Thanks!

The function of a Land Trust is similar to the function of an LLC for tax purposes and may be much less expensive for you in Massachusetts. You will still have the liability protection of not being an owner and only the property in the trust can be attached, protecting you personally. You have an added advantage of anonymity. This is exclusively how I buy property.

You will need a bank that will make a non-recourse loan or some banks will lend on these provided you put the property in the trust after the mortgage is attached.  Check Scotsman Guide for a lender.  The majority of Loan brokers and originators don't know what to do if your need is somehow unconventional, you are best served to look it up yourself. 

Thank your attorney!  He sounds smart! 

I hope this helps!

Holler if you need me.

Best regards,

Mark

Haley, I own two properties in a trust, but my process was this:

Residential Lender

1.  Purchase in my own name

2.  Move to a trust immediate afterwards with the knowledge and consent of the lender

3.  The trust was a revocable trust for estate planning purposes, and in NH I am both the trustee and beneficiary

Yes, I know many say you can't do this, but when the goal is estate planning you can certainly do this in NH as it was set up by my NH estate planning attorney.  Check with your MA estate planning attorney.

From my commercial lender perspective (different from my borrower perspective above), my requirements are set by my MA attorneys who keep me on the straight and narrow regarding MA lending law.  I lend to trust only if all beneficiaries are entities.  Which obviously means you must disclose those beneficiaries.   So if you are looking for a conventional commercial lender I'd call the commercial lending department of local banks.


The conventional residential bank I used is no longer active in this area, the mortgage originator is, though, and if you send me a PM I'll give you his name.

@Mark Elkins @Ann Bellamy thank you for the responses! I did speak with a few local lenders regarding commercial loans, and I know they also offer conventional mortgage services, so I will go back to them to see how they would work with me regarding a trust. 

Most lenders will want the property in the borrower's individual name and will consent to a later transfer to a revocable trust of which the borrower is beneficiary. If the property is refinanced, same story... transfer out, refi, transfer back in.

Some will lend directly to the trustee/trust but more common to see the first scenario. Owners title insurance is not negatively affected by these transfers.

Keep in mind that a conventional mortgage is a recourse instrument meaning that when properly administered by the lender, the buyer (you or your company) is responsible for any balance beyond the salvage price of the property. By salvage, I mean the foreclosure sale price or short sale price, which will generally not cover your litigation costs and fees and whatever the lender and their attorney tack on and will be below the balance of the loan. A non-recourse loan is limited to recovery of the value of the property. If you are going to spend the additional amount required to have a low LTV you will want to have the additional protection of non-recourse. I consider it to be only fair.

I hope this helps!

Holler if you need me.

Best regards,

Mark

@Haley M. We have purchased a couple of our properties under trusts and LLC's. Just let your lender know and it shouldn't be an issue. Like others have mentioned it will have to be a commercial loan if you put it directly into the trust. I always find it easier to work with a local credit union as they are more flexible.

Originally posted by @Haley M. :

Hi everyone! I have a question regarding financing options, my apologies if this has been answered somewhere, but I haven't been able to find an answer for it. On the advice of my attorney, I am considering purchasing my buy-and-hold properties through trusts, rather than through individual LLCs like other investors in this area do. I know that I would need to get a commercial loan to buy through an LLC, but what about a trust? I am located in Massachusetts, as are my target properties, and have not yet figured out exactly what type of trust to use. In an ideal world, I'd like to get conventional mortgages because of the better financing terms. Is this possible with a trust? And if so, does anyone have any lender recommendations that would do this? Thanks!

 Hi Haley,

A revocable living trust can get a plain normal vanilla Fannie 30YF loan. No need to transfer after closing or any of that. Not all lenders will choose to offer this due to overlays. 

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Rob L. Which credit unions do you work with?

@Chris Mason For every 1 deal we close that is a direct loan to the trustee of a revocable trust we close 50 with the beneficiary who at closing takes a deed out of the trust into his/her individual name, signs the note and deed of trust individually, etc., and then the property is transferred back in some time shortly thereafter.

"Overlays" sounds like a fancy term for "been there, done that, no thanks".

Originally posted by @Tom Gimer :

@Chris Mason For every 1 deal we close that is a direct loan to the trustee of a revocable trust we close 50 with the beneficiary who at closing takes a deed out of the trust into his/her individual name, signs the note and deed of trust individually, etc., and then the property is transferred back in some time shortly thereafter.

"Overlays" sounds like a fancy term for "been there, done that, no thanks".

Nah, we do them on a not infrequent basis. Overlays are pretty common. Plenty of posters on here have said that someone at Quicken Loans told them they "couldn't" get an FHA loan on a triplex or fourplex, for example, because the person at Quicken told them that "FHA doesn't allow it." But we all know that's BS and just a Quicken overlay, not from FHA at all - ie, that's an overlay. (Not picking on Quicken, that's just probably the most frequent/obvious example we see on these forums)

My market might be a little unique since that whole "transfer after closing!" thing might come with a whopping $15 per $1k in value transfer tax (Oakland and Berkeley)... at closing AND THEN when the transfer is done. So I def have a good reason to be on top of the trust issue that LOs in DC/NoVa/MD might not have -- we're talking >$10k in savings here, not $300 or $650.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Chris Mason thanks for your insight. So it does sound like I can get a Fannie 30Y fixed through a trust, it just depends on if the lender will lend it to the trust immediately or if it will need to be transferred from my name to the trust after closing. So the lender really has the say here as to what I can do.

@Mark Elkins   were do you find non recourse loans for rental properties.. ??

@Haley M.   just curious is the trust idea for asset protection or estate planning ?

in the real world if your talking about asset protection.. any issue happens your going to get sued personally anyway.. and your going to spend thousands trying to say you should not >

you may want to talk to good insurance man about umbrellas policy if its asset protection your worried about.

and if your just starting and don't really have deep pockets and I mean deep.. theres not a lot to worry about anyway.

just a lot of expense..

@Jay Hinrichs it would be for both asset protection and privacy; I hear a lot of conflicting advice about this issue, some say just get a massive umbrella policy (which I plan to), others say get the insurance AND make sure the house isn't in your name. Seems like there is no easy answer, that it's personal preference. I can see both sides of it for sure. And while I am just starting out in this particular business, I do have some significant assets that I want & need to keep protected from any real estate investments gone wrong.  

Originally posted by @Chris Mason :
Originally posted by @Tom Gimer:

@Chris Mason For every 1 deal we close that is a direct loan to the trustee of a revocable trust we close 50 with the beneficiary who at closing takes a deed out of the trust into his/her individual name, signs the note and deed of trust individually, etc., and then the property is transferred back in some time shortly thereafter.

"Overlays" sounds like a fancy term for "been there, done that, no thanks".

Nah, we do them on a not infrequent basis. Overlays are pretty common. Plenty of posters on here have said that someone at Quicken Loans told them they "couldn't" get an FHA loan on a triplex or fourplex, for example, because the person at Quicken told them that "FHA doesn't allow it." But we all know that's BS and just a Quicken overlay, not from FHA at all - ie, that's an overlay. (Not picking on Quicken, that's just probably the most frequent/obvious example we see on these forums)

My market might be a little unique since that whole "transfer after closing!" thing might come with a whopping $15 per $1k in value transfer tax (Oakland and Berkeley)... at closing AND THEN when the transfer is done. So I def have a good reason to be on top of the trust issue that LOs in DC/NoVa/MD might not have -- we're talking >$10k in savings here, not $300 or $650.

Good point regarding transfer taxes. We're so used to seeing this but I didn't think about other jurisdictions gouging their citizens for thousands.

Note also that most of our deals involving trusts are definitely not the FHA variety. High net worth, high value properties.

well on the privacy issue that's a personal preference for sure .. you have the super paranoid

although I find the best thing to do if your going to land lord is just be a good landlord.. do not be a slumlord.. have great insurance.. I have owned hundreds of homes over the last few decades with no issues.. but you never know.

But one thing I know for sure..  all this stuff does not matter if you actually get sued plantiff will figure out your at the controls and you WILL get named.. then you want that insurance to defend you.

Does not mean they have a right to or are correct..  But there is no way a plantiff is just going to sue your company and not figure out your at the controls and name you personally that's simply not the real world. 

@Jay Hinrichs   Just look for any lender who doesn't need your personal credit or guarantee to lend on the asset value.  I would look in Scotsman Guide to find the lenders that your broker/originator doesn't know about.  Otherwise, search the internet and ask other investors.

Now, please forgive my rant:

There was a time when I was told that these loans didn't exist and I believed it but, consider this, investments in your retirement account are FORBIDDEN to use recourse funding. The requirement for protection is obvious, the government can't allow people to speculate in real estate or other leveraged assets in any way that would jeopardize their IRA's to be attached for more than is borrowed or it would void the protection afforded to those types of accounts.

If IRA's can purchase property with lending that MUST be non-recourse than, non-recourse loans are available. If there is a party willing to invest in this type of leverage instrument, why would they limit themselves to only lending to retirement accounts?

I think the biggest problem with finding these types of lenders is starting to believe the ignorant and the arrogant deniers of the existence of these loans.  I'm not saying stupid, just ignorant of the facts.  What I think happens is that the largest employers hire and train the largest number of brokers and originators and they don't want them to sell non-recourse products so they don't teach them that they exist.  Not knowing, these people don't know that they don't know these loans are indeed available and they never look or try to get them.  When someone inquires because they read a comment like this one or in a real estate investing class, these broker/originators just tell them that these loans don't exist and never check their own presumptions.

Another myth that harms investors is that there is no such thing as commercial credit or you always have to sing personally for credit.  Really?  Do you think that Mark Zuckerburg needs to run down and sign the application or swipe his personal credit card every time one of his departments needs a new batch of laptop computers from CDW?  No! of course not.  It is also true that you or any small investor can get a non-recourse commercial line of credit provided you know how to shop for it.  I drive a Ford.  Not because Ford is my favorite brand, I drive Ford because Ford didn't ask for my social security number, bank statement or tax return when they lent me the money to buy the car.  Even the dealer had no idea that Ford Motor Credit would be willing to lend me the money with no credit check based on the credit of my company!

Here are some others, most folks know, you can get a mortgage 1 day after the discharge of bankruptcy chapter 7.  What they don't know is that in Chapter 13 or Chapter 11 you can get mortgages and loans WHILE THE BANKRUPTCY IS ACTIVE AND OPEN.  In many cases, you don't even need the permission of the court.

There are plenty of things you don't know.  If you think something is or should be possible, keep asking even after you are told no a few times.  My father was fond of telling me that "If you're not getting the answer you want, it's because you are asking the wrong question!"

@Chris Mason Thanks for the Fannie 30YF info, I'll check it out.

I hope this helps!

Holler if you need me.

Best regards,

Mark

@Mark Elkins   I understand non recourse I am a non recourse lender.. LOL

but its pretty hard to find one at the same rates as full recourse loans.

My specialty is loaning to IRAs as you describe and foreign investors.

along with those looking to scale their rental portfolio.. but our rates are higher for sure than bank rates but its private non recourse.

AS well as when you get into really large loans they are non recourse

then you have the state like CA NV CA OR WA were any purchase money loan for an owner occ by state law is non recourse.

@Haley M. thanks for starting this thread. I have actually been digging into this topic quite a bit this week. I have conflicting emotions to this topic.

on one hand, I am afraid that just using @Jay Hinrichs approach of a large umbrella policy will leave you at the whim of an insurance company who will just walk away when you get sued.

on the other hand, finding a lender to lend to a trust seems like a tough task. Paying transfer tax is also another downside. 

Not sure what I will end up going with.

@Rigo V. I hear you!! My thought it will be especially hard to find a lender to do this for someone like me who is starting out, since I have no track record to show for myself unless I move out of my primary and rent it once again as I have done before. My primary is not in a trust, even when we were renting it - I wasn't worried about it then, but I've read so much more now (thanks to this website) and might consider transferring it in the future when we move out.

I now know these types of lenders exist, but trying to find one sounds like it might be a needle in a haystack situation for me... 

Haley  as @Mark Elkins   mentioned pick up a copy of the Scottmans guide there is a list of all sorts of national lenders its more of an industry publication than a general public one.. but its very well done and you can quickly see who would entertain these loans.

Originally posted by @Jay Hinrichs :

Haley  as @Mark Elkins   mentioned pick up a copy of the Scottmans guide there is a list of all sorts of national lenders its more of an industry publication than a general public one.. but its very well done and you can quickly see who would entertain these loans.

 The trick to finding a copy is to get into a mortgage office AFTER it has arrived but BEFORE the janitorial staff takes the trash out. :P

When I scanned to make this pdf that's been downloaded a bunch of times, I did quite literally take it out of the trash can.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

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