Personal or Business Loans for Newbie?

Question

I am currently in the process of starting my real estate journey, in efforts to become financially free. I am starting out by obtaining a base knowledge in real estate (books, webinars, podcasts), getting a feel for the market (Dayton, Ohio), and creating an execution plan. One of my questions for starting out would be: Is it better/easier to start out by purchasing the first few properties on a personal loan, or to start a business entity like an LLC and get loans that way? At the moment, I barely have enough cash for a downpayment on a first unit.

Any advice is much appreciated!

Heath Ryans · Answer

@Jordan Kalk short answer,

first couple properties in your personal name will be easier and cheaper to finance.

LLC's cost money to create, money to maintain, and commercial financing for smaller properties sucks.

Jordan Kalk · Answer

Thanks for all the advice, everyone!

I currently rent from a friend that owns a home, who likely cannot pay the mortgage without my rent helping out. Luckily I don't have a signed agreement with them, but it will be a tough conversation if (or when) I decide to house hack a multi-unit. Time to start saving a bit more for my first deal.

Thanks,

Aaron Millis · Answer

@Jordan Kalk My 2 cents is about the same as everyone else here. I'd say you are already thinking too much if you're wondering about LLC's. Depending on your debt to income ratio/credit/etc you should be able to qualify for a mortgage from a bank in your name. I see a lot of people go get business cards, LLC's, and all that without actually pulling in any deals and it just seems like a waste of time and money.

If you only have enough for a down payment I'd say keep saving up so that you have some reserves in case something goes wrong. That or negotiate a more affordable deal! Either way good luck and welcome to BP.

Ryan Evans · Answer

Can you get financing? If it's your first deal, just go get an FHA loan and go house hack a 2-4 unit. You won't need a lot of cash and it's an easy way into investing. Don't overthink it!

Todd C Hurst · Answer

Network as much as you can with as many other investors as you can. If you are able to find good deals, money will not be an issue. You would want to partner your LLC with other investors/private lenders for protection of your personal assets.

James Galla · Answer

Banks won't "really" lend to a freshly created LLC because there is no history of profit and loss, there is no credit history, and there is no history of assets for the bank to seize on it's default. This will lead to you signing a personal guarantee on any loan made to the LLC.

As to personal loans, banks might not like this because it may circumvent their real estate underwriting procedures if you manage to not disclose the purpose of the loan properly. Additionally, the interest rate would be fairly high compared to conventional financing. Perhaps your lender would have something better equipped for real estate financing instead of a personal loan. The solution for not having a down payment is saving money, whether that means cutting your expenses or raising your income. Perhaps you sell your current home, if you own one, and do an FHA loan on a quadruplex.

Personal or Business Loans for Newbie?

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