Hello everyone! My name is Shelby Osborne and I'm a realtor with Keller Williams in Fayetteville, NC. My partners and I own a business called Five Pillars Real Estate, LLC, where we utilize the BRRRR strategy on residential and commercial real estate.
Our business is new, as we were officially established in May of this year (2018). We're off to a good start, having successfully purchased two properties since then and closing on our third soon. However, now that we've rehabbed and rented out our first property, we're having trouble with refinancing. We want to refinance under our LLC's name but numerous lenders have told us that they'll only refinance under an individual's name.
Has anyone else ran into this issue? If so, what'd you do? We're sure there's a way around this but we haven't figure it out. Hopefully one of you can help!
Thanks so much!
Most lenders are fine with refinancing in an LLC but you will need to give personal guarantees. You probably also need to check with local or regional banks because the big guys are less likely to work with newer investors/businesses.
I work in banking, and I invest in Fayetteville.
There are unfortunately no GREAT ways to get around this. You can get portfolio lender to give you the loan in an LLC and on their terms, but you wno't get freddie/fannie terms. if you want the good terms, it has to be in a personal name.
ALWAYS line up the financing before you buy the deal
Thank you both, @Jeffrey Holst and @Alexander Felice for your input!
@Alexander Felice, we're finding this to be so true. Fortunately, we just heard back from a local bank today and they agreed to refi under our LLC's name. Since we had multiple accounts and ample cash with them, the manager was able to convince the underwriters to go through with the refinance.
Shelby Osborne, Real Estate Agent in North Carolina (#300149)
Five Pillars Real Estate, LLC
Congrats! It takes persistency and you're on it. I wish you well in your next purchase.
Glad you brought up this topic because this is the avenue I was hoping to go! Now I need to do a little more research.
@Caleb Heimsoth do you have any suggestions as far commercial lenders go? We have a local lender now who's willing to work with us but its always nice to have options.
@Jonathan Breton It seems to be quite promising and we're excited to see how this goes!
@Shelby Osborne -- which local FAY bank did you find that will do the deal? Do you know if they'll do loans on properties under $50K? Thanks, Adam
Conventional Fannie/Freddie loans do not allow financing under an LLC.
You need to use a commercial/portfolio lender but the rates/terms will be less favorable.
Would it be wiser, if one were to be doing a BRRR to wait until the refi is complete in your personal name BEFORE, and then get your cash back and put in an LLC? That should be fine I'd think? I know that doesn't help you Shelby I'm sorry but I'm wondering for myself in the future.
@Edward B. Of course, I'd be Ok with that risk. I suppose the only real worry would be for a temporary time you're holding a rental property in your personal name until work is done and / or any potential inherited tenants have vacated.
We have been purchasing properties with our business, Moongate, LLC on the Outer Banks, NC. We have been using Southern Bank and for those properties that we purchase with our LLC, we are using commercial loans. We have not found any banks/lenders that will lend to LLC's with conventional financing because most banks want to sell the loans to Fannie Mae. Fannie will not purchase loans that are in the name of LLC's. If you want to continue purchasing and refinancing with your LLC, you may want to consider using commercial loans with a local bank. Once you build credibility and have proven that your business plan works, the banks will want to lend to your LLC over and over. One thing you will need to take into account, is that most commercial loans are 5/1 ARMS, fixed for 5 years, then you readjust in month 61. If the idea of 5/1 ARMS scare you, then take this into consideration. If you want to ensure that your payment does not go up in month 61, then figure out now what you think the worst case scenario is for interest rates 5 years from now. Then figure out how much you would need to pay your principal down over the 5 year period in order for the worst case scenario interest rate payments to remain the same as they are in month 1. If rates do not go up to your worst case scenario in 5 years, then you are ahead.
Another option for you is to title your properties in your individual names, refinance, and then transfer into your LLC. You run the risk of the due on sale clause when transferring title in and out of LLC.
Thanks, you guys. You raise some valid points for sure.
@Jason Hathcock How have you liked Southern Bank? For the time being, we've been able to find investors and use their money to purchase properties using cash.
I think we're likely to title properties in our individual names, refi, and transfer into the LLC. As you mentioned, there's the due on sale clause to worry about. Aside from reading about that disclaimer in numerous forum posts, we've yet to encounter anyone who has actually dealt with the issue firsthand.
Has anyone here actually had to deal with the due on sale clause when changing names on a loan?
Southern Bank has been wonderful to work with. They helped us get started and took a chance on us on a somewhat complex real estate deal. They were able to see what we were planning to do, they liked the numbers, and thanks to BP, we were able to show them our cash flow analysis and get the financing to get the deal done through our LLC.
I only know one person who had their note called. That was during the 08' collapse and the investor was heavily leveraged and the banks were calling in the more risky notes they had on their books. I would imagine that if you are responsible with your finances and leveraging your business prudently, the banks won't feel the need to call your note(s). Good luck to you!
How would this work when doing the front end transaction with HM? From my understanding most HML's only lend to LLC's, so how do you cash out refi on the backend then?
@James Caruso Rental refinance. That assumes you are putting a renter in. If you simply have to hold onto the property due to market forces or what have you, this will not work.
You need to talk witha commercial lender and you will need to give a personal guarantee. The loans will be in your business name, but you will be personally responsible for them in case of default. I'm going through this process right now
We have been accumulating properties in our LLC's name for a few years now, but we have had to accept 15 year commercial financing, which includes a 5 year balloon.
Of course you can also go the personal route to secure 30 year fixed financing, then transfer into the LLC. This involves a few more moving parts, but seems to be pretty common.