Financing First Rental Through an LLC

4 Replies

So here is basically the gist of the situation:  

A few friends and myself have been building capital to purchase rental properties. The five of us are all 25 and are doing this together to scale as quickly as possible. Amongst the team we have a two accounting backgrounds and a freshly barred attorney specializing in real estate and we have about $50,000 in capital saved up in a bank account in the name of our LLC.

We've seen a ton of negative information about financing through an LLC and are now hesitant if that would be the best option. Should we just begin going to banks (local or national) or credit unions to see who will offer us a conventional loan? We're ready to dive in and have located a number of properties so this is the last thing holding us back.

Any advice is appreciated!

@Michael Neiman getting a commercial loan is much easier than a residential. Most small banks and credit unions will do them.

There are also a number of hard money lenders that have long term funding.

Finding a loan should be a non issue, so long as the financials are solid

@Michael Neiman If your plan is to purchase turnkey rentals with your LLC, local banks and credit unions are certainly a good option. However make sure that you are communicating with the commercial finance division (even if the property is a single family residential property) NOT the residential finance division. If the loan officer uses terms like DTI (debt to income) then they are a residential loan officer (commercial loan officers would use the term DSCR in place of DTI).

The reason for working with the commercial lending division is that you want to keep the property deeded in the LLC and have the loan issued to the LLC (with the members of the LLC being the guarantors). Normally this will mean that the loan should not appear on credit reports (as long as it doesn't go into default). The rate will be slightly higher as a commercial loan, but still livable. The down side to buying a turnkey property is that the typically any equity in the property is what has been created by the down payment that you made.

If your plan is to purchase a property that needs some improvements/updates, have the improvements completed, then gain a tenant - then you might want to consider a rehab lender that would extend financing for a portion of the purchase & improvements. The rehab lender would extend a short-term loan at a higher rate and fees, however you would be gaining equity in the property when you conduct the improvements, perhaps increasing the market rent - thus increasing the value. 

After improvements are completed and the tenant lease is in place you would refinance with the local bank or credit union for a long-term loan at a lower rate and perhaps be able to recapture some of (or all) your funds invested to date in the property during the refinance. This is called the BRRRR method (Buy, Renovate, Rent, Refinance, Repeat).

You guys have much to research and discuss prior to investing, and please remember that whichever option you feel is best for your personalities and risk levels, always buy in markets (geographical areas) that you are comfortable with and are OK visiting any time of the day or night. Good luck.

@Michael Neiman First of all, congrats on jumping in! I too started an LLC with a buddy about 6 months ago and we just locked in our 4th house. My advice: buy a house. You won't be able to stop at one.

The challenge you are describing is one that we faced as well. With 5 of you, your best option will be to secure a loan through the LLC.

We called around until we found a local bank who would do 80% ARV loans. Most lenders said 80% ARV or 80% loan-to-cost, whichever is lower. That is not ideal if you're looking to BRRRR as it means that no matter how good of a deal you find, you're always going to need to put 20% down.

Here is how it works with our lender. We get a property under contract, get an inspection, draft up a repair list with associated costs and submit to lender, he then gives that list to the appraiser. The appraiser then takes that list and appraises the house based on what it would be worth once those repairs are made. That number is our ARV and the lender will give us a loan to our LLC for 80% of that number. So, the formula for us when we look for properties is simple: purchase price + rehab must equal 80% or less than ARV. Another rule of thumb of ours is that the property must rent for over 1% (ideally 1.5%) of ARV or else we're underwater.

Current terms are 6% interest, 20 year am, 5 year balloon. Additionally, the loan is interest only for the first 6 months. We are going to revisit these terms for future properties b/c margins are slim on anything under 1.5% purchase price to rent. However, it's really nice to be able to buy several properties with little money.

My advice would be to search the BP forums for others doing BRRRR's in your area. Send them all private messages asking for a BRRRR friendly lender they recommend. That's how we found ours. Wish you the best! Let me know if you have any questions.