How do lenders consider loans to LLCs?

10 Replies

Hi,

My friend and I are starting an LLC for real estate investing. We have seed money, but I'm unclear how bank lending to an LLC works. Does a lender look at the business plan for a particular property to decide whether to provide a loan? I have to assume that's the case given the LLC separates protects personal assets and the LLC is new. There are no assets owned by the company except for the seed money.

Right now, before the formation of the LLC, we'd like to purchase a property because we feel it's a very good deal. We can co-sign on the loan and purchase. From what I read in BP, we can quit claim the property into the LLC.

Appreciate the insight.

The banks that I have been to, understood my LLC, license, EIN, etc... But, as a share holder, principle, (president/chair/executive), partner etc... I have found with or with out capital, they will run your social too. They request for a guarantor that is a; owner, partner, principle etc..

Kevin -

As a commercial lender and a SFR real estate investor, I'd like to weigh in on the topic. If you purchase the property in the name of the LLC, you will not be able to get a conventional mortgage loan (30 year fixed rate). You could purchase the property in your names personally and get a conventional mortgage loan then quit claim it to the LLC the next day although banks generally frown upon this. You should be able to get a commercial loan from an area bank with the LLC as the buyer/owner and the members being personal guarantors. The rates aren't as good as conventional mortgage rates (5 year term around 5-6% with a 15 year amortization) but the closing costs should come in a bit cheaper.

With a commercial loan, you will not need to provide a full blown business plan. The bank will look at the members/guarantors financials to provide the strength for the deal and look specifically at the collateral to ensure adequate loan to value and debt service coverage. I often approve a deal for the members/guarantors on a purchase before they even have an LLC established.

Hope this helps - Jeff.

I really appreciate the quick replies. Thank you! 

I'm unclear... if the bank is looking at the members/guarantors to provide strength, doesn't that kind of go against the reason for creating the LLC in the first place (keeping personal assets out of the business)? Sounds to me like the LLC, in this case, would not provide owner protection.

I'm sure I'm missing something. 

Good question Kevin. For most people, the reason for creating an LLC is to provide liability protection although "piercing the LLC veil" by a prosecuting attorney is a whole different discussion altogether.

As for the financing, a bank generally sees an LLC as a shell entity and the members are the face and strength behind the deal. Can you get a commercial loan to an LLC without having to give a personal guaranty? Possibly if you ask enough bankers around town but in my experience 99% of all loans include a personal guaranty. It's just an industry norm.

Hello Kevin, I am doing the same thing as well and I am still new to the process but what I have studied and learn so far in order to use just your LLC and not have be the personal guarantor, you will have to get an Dun and Bradstreet number and establish business credit check the link below will it gives some you some good info

http://www.youtube.com/watch?v=glARDNtog4A

The whole "must own in an LLC" is way over blown, and has a few disadvantages. Getting a loan is obviously one of them. To get REAL credit in the LLC name only, would take years of operating as an actual profitable Business. Generally the whole LLC thing is a waste of resources and time, for most investors. Get insurance.

Very helpful insight. Thank you to everyone who replied. I get it now. I was definitely was wondering about insurance. I guess if I'm going to be a personal guantor regatdless, I'll probably skip the llc and get insurance. 

Originally posted by @Jeff Sims :

Good question Kevin. For most people, the reason for creating an LLC is to provide liability protection although "piercing the LLC veil" by a prosecuting attorney is a whole different discussion altogether.

As for the financing, a bank generally sees an LLC as a shell entity and the members are the face and strength behind the deal. Can you get a commercial loan to an LLC without having to give a personal guaranty? Possibly if you ask enough bankers around town but in my experience 99% of all loans include a personal guaranty. It's just an industry norm.

Kevin, I agree with Jeff. I have had this conversation with several bankers and they all say it's an industry norm for me to guarantee the loan even though it's put in the LLC's name. Good luck with your investing career!

Mike

yes, it is called a non-recourse loan, If you have credit tenant in your building, no need for personal guarantee, because you get loan due to the tenant.

Definitely consult with a local mortgage banker as to the best way to take title to the property based on your exit strategy (buy/hold or flip).  Not all mortgage bankers offer the same products, so I would clarify your intent prior to purchasing the property. Either way you go, you will most likely need a personal guarantee.

Of course speak with an attorney and a CPA as well for legal/tax ramifications. 

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