With an LLC do you use commercial lending?

20 Replies

I'm considering getting an LLC to start real estate investing, and I feel like I read somewhere that under an LLC you would need to qualify for commercial lending. How easy is that to qualify for commercial lending with a brand-new LLC? Would you encourage that? I am brand-new, and want to buy a triplex.

Hi Christina, so you have an LLC that you use for your REI business? did the bank write commercial loans?

Do you suggest getting an LLC starting out, or just do it on my own for my first investment?

I feel I don't really know where to start, however feel it is possible to get a loan for a triplex, but how?  How do most people start out.  I feel I need to get this first one under my belt to start rolling to my goals of adding investments each year!  

With commercial mortgages they're more interested in the property than you personally. They are also easier to get than conventional. 

You don't need an LLC just starting off though. You can use an umbrella policy until you get a larger portfolio.

Yes If you have an LLC you will have to get a commercial loan. The loans will be at higher rates and expect to put more money down.

The fact your LLC is new won't mater much since the loan is secured by a mortgage. They will also likely look at your personal finances and yes you will have to personally guarantee the loan.

If you own in your own name you will have a little more liability but you can get better financing. If it is in your own name and you live in one of the units that is the best case for getting financing.

I agree with @Ned Carey for 2 and a half of his points. On point 1 I disagree an LLC loan on a 1-4 unit property is still a residential loan. As he also mentions in point 1 it will on average not be as good a loan and may have commercial features, but it is still a residential loan. And you have to work a little harder to get them l, but you can. I have plenty.

@Matt Hoyt I'll take 2 1/2 out of three.

May be it is a mater of How different lenders word it. I have certainly found a lot of things are done differently on the west coast.

I have been told that almost no one in the secondary mortgage market will buy a loan by an LLC on 1-4 units. Therefore a commercial loan is needed. It's how lenders here have described it.

@Ned Carey 

Correct everyone words it differently. And correct they can't be CERTAIN they can sell them so they act as such.  But they are most often still sold, well over half of mine have been even though when I obtain them I pay a "non-salable" upcharge. Still, your point is valid there.

The key is, a 1-4 unit loan even with an LLC is covered by RESPA. Certain consumer protections are still provided. That is the differentiating factor. Banks have to play by certain rules on the 1-4, and they don't on 5+. That's why it's still residential. Everything beyond that is as you said, people just wording it differently.

Matt, thanks for clearing this up. I've seen so many similar posts. At the end of the day, commercial lending is based on the property characteristics, not the borrower or the type of entity that is the borrower. 

@Matt Hoyt I would respectfully disagree with your assertion.

1st off lets clarify that generally speaking there are two types of financing - Conventional (Fannie/Freddie/FHA/VA/USDA) and Portfolio (Residential and Commercial). Yes, commercial is not the only type of portfolio loan.

For a 1-4 unit (residential) property, the buyer has the option to buy using conventional financing or portfolio financing. If they choose to hold title in LLC, then portfolio financing is their only option. Conventional financing is only available to individuals. Last I checked LLCs don't qualify an individual.

No way will you be issued a conventional loan with title in LLC. Just not going to happen.

@Emily Debes I am a commercial broker and financing consultant, I deal only in Commercial Financing, this means exclusively with business entities (i.e. LLCs). To answer your question about qualifying with a brand new LLC, I can tell you that time in business is not a factor many LLCs are created just prior to the transaction and are special purpose entities (SPE). Being new on paper is not an issue. I would worry about only 3 things if I were you.

CASH - Unlike residential loans we don't care about W-2 income but you need money to put down, plan for about 25% for a buy and hold 15% for a fix and flip.  

CREDIT -  Yes it is a business loan but you still need to personally guarantee it in most cases.  Looking for FICO scores of about 600+

COLLATERAL - This is the property generally so long as it appraises for what you expect we are going to be OK. Again the lender will usually do 75% LTV

As long as the three C's check out chances are you can qualify. Now to your question about would I encourage the LLC; I would but, I am bias as I do not deal in the residential lending space. Commercial loans are more flexible, give you more options as to what you can buy, and in my opinion generally easier to get done, but they have higher rates anywhere from 5% to 8% for soft money and 9% to 14% for hard money. It really depends on what your strategy is and how you want to grow your investments.

@Emily Debes The post by @Nathan Click is pretty much spot on. The only part that was left out of the CASH Section was you will need 6-12 months of Capital Reserves (depending on the lender) required to be of monetary equivalent of 6-12 months of Mortgage Payments and Property Taxes. In some states, lenders will also include Property Insurance as part of the Mortgage Payment.

There are two types of Commercial Loans: recourse (requiring a personal guarantee) and non recourse (no personal guarantee required). For me, Plan A is to pursue Non Recourse Loans, to preserve my very strong FICO. Only as a last resort will I pursue a Recourse Loan.

@Upen Patel

So tell me where I have gone wrong:

I would define a conventional mortgage as:

A loan that is not guaranteed or insured by any government agency (FHA, VA etc).

After that a conventional loan can be conforming which is defined as:

A loan that meets certain guidelines as set forth by Fannie Mae and Freddie Mac (LLCs among other things don't qualify).

Beyond that loans made on 1-4 units are simply conventional non conforming. This is what we have.

I would argue we are getting those and they are still residential, our bank says so and it makes total sense. The fact that may or may not portfolio it is irrelevant to the definition of residential.

When we get loans for our 4-plexes, in the name of our LLCs, we fill out the Fannie Mae app form 1003, they disclose credit and appraisal etc. The note is signed on the Fannie Mae Form 3005. We are underwritten based on our income and assets, not those of the property as in a commercial loan. When we get commercial loans for our commercial properties the underwriting, rules and process is completely different.

Matt

@Upen Patel , and @Nathan Click   Is a "Commercial" loan a standard industry term? Is a portfolio and a commercial loan the same thing? 

I was taught that a "Portfolio" loan was one that was held by the institution in their own portfolio of loans vs being sold to the secondary market. Is this correct?

@Ned Carey - You are correct about portfolio loans however Commercial loans are not necessarily a portfolio loan. "Commercial Loan" is standard term in the business lending industry. It basically means a B2B loan. There are many types of them. Bigger Pockets investors focus on B2B or commercial real estate (CRE) loans obviously , and under the CRE loan umbrella there also many sub-types such as soft money and hard money which can be further broken into bridge loans, blanket loans, permanent loans, construction loans and more. Any of these types of loans could be held in portfolio or sold off depending on the lender. I hope that helps.

Originally posted by @Ned Carey :

@Upen Patel, and @Nathan Click   Is a "Commercial" loan a standard industry term? Is a portfolio and a commercial loan the same thing? 

I was taught that a "Portfolio" loan was one that was held by the institution in their own portfolio of loans vs being sold to the secondary market. Is this correct?

Generally speaking you are correct. Portfolio loans are held in the banks portfolio. Many commercial loans are portfolio as its be banks own money and are held. As Nathan explained, there are instances when a commercial loan is sold off (e.g. big mall construction loan - might be sold to a REIT, which would be further "sold" to the REIT buyers).

For the purposes of BP, as far as I can tell, when folks say portfolio they mean commercial. Though there are residential portfolio loan. The main different being that a residential portfolio is a true 15 yr/30 yr fixed loan, vs the commercial portfolio has is a 5 yr/7 yr balloon.

Hope I did not muddy the water too much.

@Upen Patel there are many commercial loans that do not balloon and will give you out to 30 year terms.  The thing about commercial lending is that because it is not an overly regulated industry there are many types of loan products out there.  Basically if a lender can dream it he can do it.   

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@Ned Carey @Nathan Click @Upen Patel

Okay Gentlemen, I did a little work on this today, as it is important. People are generally way way off when they speak about it.

First there is a general misconception you can't get a residential loan with an LLC borrower on a 1-4 unit property. I was always sure you could, as I have 23 of them with 4 different banks. They all have NO balloon, and they are all 30 year amortization, fixed for 3,5 or 7 years. That makes them conventional non conforming. They all follow theconsumer protection laws that have to be followed - Parts of Dodd Frank, TILA and other disclosures mandated by the CFPB. My particular LLC 1-4 loans are underwritten on the borrower ability to repay, not the three C's from Nathan's post. My Chase 5+ loans are underwritten with those.

I called all 4 of my loan officers for these 1-4 properties, all of which who are employees of said banks. They are all residential loan officers, don't do commercial loans, and state I have residential loans. Furthermore they state you can't have a commercial loan on a residential property. That last part I'm not 100% on, I'll come back to that.

Portfolio lenders are simple to define. The bank is saying they are going to keep them. They price them as if they aren't going to sell them. They may underwrite generally as they please. But they still have the right to sell. Residential or commercial. All 23 of my residential LLC borrower loans on 1-4's have been SOLD. I have 5 additional LLC borrower Commercial loans at Chase. Those are with a special division of Chase (CTL) and have not been sold.

I would assert that simply as I always have that commercial loans are those made on commercial property and residential loans those made on residential property. This obviously excludes bundled residential loans and other oddball scenarios. The problem I see is the definition of commercial loans backs that up but the definition of residential has a potential loophole:

According to 12 USCS § 5102 (8), the term residential mortgage loan means “any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in section 103(v) of the Truth in Lending Act [15 USCS § 1602(v)]) or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined).”

If it is truly for business purposes by a true business theoretically it could be commercial by this definition is my read??? BUT all banks are paranoid of getting sued so they disclosure it anyway, making it markedly different from a commercial loan and tossing it back into residential in my opinion.

I also called Fannie Mae, the CFPB and the CA Dept of Business oversight. All three of them had no idea what I was talking about. The lawyer at the CA association of realtors agreed with me but not convincingly so.

But for sure people here on BP are saying they're getting commercial loans and I'm pretty sure they're getting residential ones. And the characteristics of the loans are irrelevant unless prevented by residential rules. As Nathan said if you can think of it they can make a loan on and that doesn't mean anything.

Matt

Why does this not surprise me one bit:

"I also called Fannie Mae, the CFPB and the CA Dept of Business oversight. All three of them had no idea what I was talking about."

Buying under a LLC does provide a level of protection against legal action. Using a LLC does indicate a business transaction but the borrowing entity will have to stand in as a personal gurantee on the transaction. On single family 1 to 4 units bank financing will allow up to 10 properties with great rates but you have to buy under your personal name. Forming a new LLC will not affect your ability to obtain financing because loan approval is based on the borrowers personal credit not any credit estabilished by the LLC. Stated loans and loan based on the properties cash flow are popular right now. For 1 to 4 units the LTV's range from 70 to 75%, rates range from 6.5 to 8.9%. Stated loans are also offered for commercial properties with LTV's from 70 to 80%.

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