Need llc but have conventional mortgages

15 Replies

I bought my first rental 2 years ago and will close on my 3rd in a few weeks. I plan on growing the owner managed landlord business and need to get serious about liability and asset management. Right now I am regular sole prop with title in my name etc. One house has mortgage, one house is free and clear and the 3rd will have a mortgage filed by my private, short term (24 month) investor (father in law). I tend to buy distressed fixer uppers and go in with cash to buy and rehab and then plan on getting long term, conventional financing at 80% of appraised value after properties have seasoned for 1 year. That will effectively cash me out and return all funds so that I can repeat the process a couple times per year once I get the process started.

Unfortunately, the easy, favorably termed conventional mortgages are for consumers and investors but not llc's or other corporate entities. I can hold title in my name or trust but no llc and if I transfer after closure, whamo....due on sale clause. Also, from what I understand, I am capped at 10 mortgages...several years from that roadblock but would like to understand options.

From what I understand, I need to form llc...in Oklahoma, tulsa area, single member and series llc's are accepted in the law so we are fortunate there. But how do I form llc with title in my name or in trust?

If I am managing my own rentals, technically titled in a trust in the future once all this gets figured out, do I need to be licensed or a realtor, or can I still go the diy route since they are basically mine?

How do all you smart people do it? Llc for the management company and for each property?

Right now I am sole prop with tons of insurance and great properties but I've been told I have a time bomb on my hands.

Please help me understand how all you smart people do this.

Thanks

Hey there @Chris Simmons ....... man you got some tough issues to try to sort through. Let me start by saying I am not an attorney or CPA and I advise you to seek the services of licensed professionals for legal and tax matters. Ok?

Alright so that being said, you need to do a little leg work here and you will be able to find what you are looking for pretty quickly and easily. Forget about main stream lenders, they work with homeowners for the most part so you'll want to hit your local banks and talk to the highest person there you are able to reach.

If they all tell you no then Google search for corporate loans, corporate mortgage, borrow money to buy real estate in llc etc. You want to find banks (maybe out of state and credit unions) who do this on a regular basis.

If that's a flop start networking for private note buyers and see what you can do in the HUGE private mortgage industry. Example scenario for a private mortgage buyer would be something like this: They discount your mortgage by 3%-8% of the loan balance, you should have 3+ years to go, interest rate of about 2-3 points over prime (which is what you may be paying a bank for a corporate loan) and decent credit. Effectively your father-in-law would make and record a mortgage and after about 4-6 months, "he" would sell it to a note buyer.

Let's look at the numbers for you and the investor:

Mortgage: $100,000

Interest Rate: 7.5%

Term: 10 Years No Prepayment penalty

Note buyer discount: 8% (worst case scenario) PLUS 7.5% on $100,000 mortgage which he only paid $92,000 for. 12.26% Annual return to the note buyer PLUS his 8% when you pay him/her off. There is a huge upside for the note buyers and they will do these all day long.

Your father-in-law gets $92,000 from the note buyer right? What happens after that is between you and your father in law as to the proceeds being split if that happens. I say that because I assume you buy the property at a lower price, improve it, increase value then refi out at 80%.

Just some food for thought....... I hope it helps.

Some good reading about due on sale clause:

http://www.biggerpockets.com/forums/83/topics/102191-due-on-sale-clause

I think you may be over-inflating the power of the LLC. If your main concern is liability, an umbrella insurance policy could well be your best bet. I would feel more secure with that than with an LLC that may or may not stand up to a legal challenge. Talk with an insurance person that works with investors and get some input from them on it.

@Chris Simmons I would check with your tax accountant first. An LLC will help with liability in the event you have a huge lawsuit. By and large a lot of your liability can be managed with a good insurance policy then get a one or two million dollar umbrella policy for all of them. The cost is not that bad. If you do an LLC make sure you learn how to follow the proper formalities so it actually means something.

Great job on getting your investment machine rolling. Do not get too uptight on having an LLC immediately.

We have an LLC in Oklahoma. First off I'm not sure you will get an 80% LTV you are looking at 70% more realistically. We have a portfolio loan through a local bank with a revolving line of credit. So we buy using the revolving line, rehab then flip it over to a loan. They have no limit on the number of mortgages we can hold. I have several under a portfolio loan a couple of houses under separate loans. Check with Bank of Oklahoma or a smaller local bank. They have boards that decide how much, who they will lend to and the terms. I work with FNB in Oklahoma City but they don't work in the Tulsa market. That's one drawback working with them as they have a 50 mile radius where they will loan money. Good luck.

I am new to the investor market but this is what I did, along with another person I know doing the same thing. After researching and talking to my accountant, I chose to start my 1st purchase under a single member LLC and hired a rental manager. I did this for asset protection, and single member for tax purposes. My husband and I had to personally back the commercial loan that we got thru RCB Bank. The commercial loan runs under the LLC company so this does not hit your personal credit report like traditional mortgages. You provide your financial information for credit worthiness and back the loan. They provide us with a 80% or 90% loan based on inspection and equity built into the house. Loan amortized on 15 years @ 5% paid back in 59 payments with balance due on the 60 payment. Will be able to redo loan at the end of the term with no money down as equity will be built in. I checked all the local banks that I could think of in Edmond and this was the best I could find, there are several banks that refuse to do a loan with an LLC or at a lower % with more money down. When we hit the limit of houses, if we do, we will then open an LLC under my husbands name. I think you have some RCB banks around Tulsa so you might want to check them out.

I will be meeting with an attorney this week to discuss land trusts and llc formation. I am familiar with but hesitant to go straight to the commercial loan side. That is due to the fact that I am a commercial loan work out officer for the largest bank based In Tulsa. Being familiar with their ultra conservative lending policy and knowing first hand how I and others in my department deal with downgraded credits makes me think the hassles and risks of consumer type loans are a better starting point until I can make sure that 1) I am well capitalized and 2) a big enough relationship to be worth something to them. I routinely deal with 5 year balloon notes that don't get renewed and all of a sudden they have to scramble to avoid workout. Loan policies and lending risk preferences change all too often in my experience. When I finally make the switch to commercial lending, I will rely heavily on my past banking experience to make sure I don't end up in loan work out department of some bank.

@Jean Bolger and @Jerry W. , I wonder if you are over-inflating the power of an umbrella insurance policy. Do you know of any cases where a umbrella policy has paid of a claim? In my experience, reading the fine print they all basically say that that won't pay claims on any exposure that you could/should have had a policy for. So, if you're running a rental real estate business, they expect you to have a business (e.g., general liability) policy to cover that. If you don't, they are not obligated to pay. If you do, why bother with the umbrella?

Any insurance specialist out there care to chime in?

@Chris Simmons you may find this blog that BP member @Deidra Hubenak just wrote (she's a tax attorney and CPA):

http://www.biggerpockets.com/blogs/5070/blog_posts/37210-llc---should-i-form-one-or-not

I do believe for some of the reasons you have already stated, you may have missed the boat on the best time to title your homes into a LLC.

@John M. I'm not an insurance person, but what I think Jean and Jerry were trying to say is to not do the LLC at all and get an umbrella policy in addition to your homeowner's policy. GL policies are for companies only, so a rental home would not have and could not get one of those. Umbrella policies pick up where homeowner policies leave off. Making sure you are dealing with an insurance company who provides exactly these kinds of policies is key.

@Sharon Tzib , homeowners policies are for owner-occupied homes, not rentals. I think what you're suggesting is to get the umbrella policy in addition to a dwelling fire policy. Regarding GL policies being for companies only, I think it would be more accurate to say they are for "businesses" only. The OP said he is running his business as a sole proprietorship. I would be very surprised if he couldn't get a GL policy to cover his business exposures.

My point regarding insurance is that Umbrella policies is that they expect you to have appropriate coverage for all expected exposures.

@John M. , yes as I understand it the umbrella is an additional policy. You can't get that instead of some other coverage (in fact, I had to increase my liability coverage on my car in order to get the personal umbrella.)

My point is that many folks think that getting an LLC will automatically protect them in a lawsuit related to a rental property. But if you have substantial (or semi-substantial...) assets outside of the LLC then any smart lawyer will start looking for ways to discredit the LLC (or "pierce the corporate veil", I think they say). If you have an umbrella policy that will cover up to or above your net worth it becomes much easier for them to try to negotiate an insurance settlement than to sue for damages. @Jerry W. could probably clarify it better, as he is actually a lawyer and no doubt understands this much better.

I do have an LLC myself. But it's on a large property that requires commercial funding anyway. I also have an umbrella liability policy on that property with the LLC and my management company as named insured. (This is in addition to my personal liability policy)

My personal umbrella policy is less than $20/mo. I am a careful and, I hope, considerate person. But **** happens. We usually (in this business at least) think of insurance as protection against spurious lawsuits, but anyone could inadvertently make a mistake that has disastrous consequences for someone else. If I were to do that, I would want to be able to make recompense to the injured party. But I also wouldn't want to go to the poorhouse to do it.

@John M. I think we might be dealing with some semantics here, and again, I'm not an insurance expert by any stretch of the imagination - I was just offering my interpretation based on my years of being both a landlord and a business owner of a S-Corp.

My rental home insurance company calls it a "Landlord Package" and it is not just for fire. Yes, I, and I believe Jean and Jerry, were suggesting that over and above this, one can get an Umbrella Policy to pick up where this package leaves off.

If you like the term business better than company, that is fine - they will both suffice. I think I misunderstood your comment - I thought you were suggesting taking out a G/L on the rental property itself, not his overall "rental business." It would be interesting to hear from an insurance expert what would be most prudent - umbrella, G/L, both? Thanks!

I have seen articles about several states' rulings that make single owner LLCs hard to defend. Any little mistake or wrong answer can cause a ruling of alter ego, invalidating the protection. That does change significantly with multi-owner LLCs. I am neither a lawyer nor superhero, but that is what I have read.

@John M. an umbrella policy is NOT a primary coverage insurance. it is like a secondary insurance that only kicks in when you have exhausted your primary insurance. So if you have $500K in primary insurance, if you get a $400K settlement against you, your umbrella policy pays nothing. If you get a $700K judgement against you the umbrella policy pays the $200K part of the judgement that exceeded your primary coverage.

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