Financing/organization structure

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Financing/organization structure

Sergio AltomarePro Member
Rental Property Investor · Greater Philadelphia · Member since 2012 · 135 posts · 60 votes

Hi Everyone,

I asked a similar question to this the other day, but didn’t get any response so let me try and clarify it a bit.

My girlfriend and I are interested in starting a real estate investment company to buy rental properties. We have located 2 potential properties (besides 2 that are ours), both of which are duplexes. We have a number of friends and family who are interested in investing, but we can’t seem to get a good understanding on the best approach for making these types of deals happen. We expect to be able to raise at least 30% down on a $275k property. I have a call in to a lender, but have not gotten a call back yet. Because we already have one investment property together and are planning a second, we would be charging a nominal finder fee and providing the management of this new deal. Here’s what we’re confused about:

1) Should we shoot for establishing an LLC (or other type of partnership) first, and then get financing through it? If so, I imagine we need to get credit data, etc. of our investors? Would they do that directly with the lender, or do we have to do this? I'd rather not have to ask family and friends for personal information.
2) I understand that getting a loan through an LLC with no history is difficult, is this true?
3) Should we buy the property through a conventional loan and then moving it under an LLC or other business structure? How would we do this with multiple investors?
4) If we move a property purchased through an individual loan and then try to move it under an LLC, do we need to pay transfer tax? I’ve read yes and no, but looked through various PA and Philadelphia regs and can’t find an answer. Transfer tax in Philly is 3% and PA 1%, so this is a big impact of even considering this.

Any help that anyone can provide is much appreciated.

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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
Originally posted by Sergio A.:
...
4) If we move a property purchased through an individual loan and then try to move it under an LLC, do we need to pay transfer tax? I’ve read yes and no, but looked through various PA and Philadelphia regs and can’t find an answer. Transfer tax in Philly is 3% and PA 1%, so this is a big impact of even considering this.

Any help that anyone can provide is much appreciated.

As Bill Gulley (thanks for the @mention heads up) already pointed out, that transfer will be considered a taxable event for real estate transfer tax purposes by the PA Dept of Revenue. It is a big OUCH to have to pay 4% RTT for transfers in and then back out of LLC when people try to get financing in their personal name (and then want to do a refi similarly).

This other thread discusses PA transfer taxes, and I have some more info there that you should consider:

http://www.biggerpockets.com/forums/93/topics/80878-transfer-taxes-on-contract-assignments

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  • Brandon TurnerPro Member
    Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
    13y

    Hey Sergio A. -

    Interesting problem. I'm not sure how much help I can be, but I'll give it a shot.

    1.) Definitely ask a lawyer. I have an LLC, cause my Lawyer recommends it, but ask one this. Very important.

    2.) Yes, LLC loans are tough. I've always purchased through personal names, (thus requiring everyone's tax returns, etc - yes, it's a pain) and then moving it into an LLC after.

    3.)See #2

    4.) In my state, my lawyer says no as long as the names stay the same (original names on the property and the names on the LLC.) Again - a good lawyer specializing in this stuff can tell you in 2 minutes.

    Hope that helps! Fyi - I'd recommend throwing a picture up on your profile as soon as possible. You'll get a lot more responses on the forums when people can see you! :)

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  • Sergio AltomarePro Member
    OP
    Rental Property Investor · Greater Philadelphia · Member since 2012 · 135 posts · 60 votes
    13y

    Thanks a lot, Brandon!! This is very helpful - especially the recommendation on sticking my mug out there.

    What you said makes sense. I do have a follow up question for you though. When putting a deal together with multiple individuals, do you find the lender and give he or her the names of your investors, or do you have to serve as the coordinator and get all of the documentation? I imagine it's not a problem when you are established, but I imagine there could be some reluctance in people giving all that personal information to you right off the bat.

    Not that I'm not trustworthy, but my reputation is as a technologist, not real estate investor.

    Also, do you have any suggestions on finding a decent lawyer in the area? What kind of fee structure should I look for?

    My girlfriend's dad is a an attorney, with a good amount of real estate investing experience, but he is licensed in CA.

    Thanks again for all your help!

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    13y

    Steve Babiak is our resident PA transfer tax guy, and from what I saw when he posted the tax code there, yes, anytime an interest is transferred you get to see the tax man.

    Yes, getting a loan in an LLC can be more difficult as it will be a commercial loan, not a secondary market type.

    IMO, getting a loan in your name and then assigning to an LLC isn't really on the up and up, but it's done, usually without fanfare. I wouldn't bring this up with your lender as a question.

    If you intend to manage for the LLC, you could bump into RE license requirements. If you are in the LLC that owns the property that won't be a problem. Your family might like a passive income, so they could have an LLC and that LLC could be a member of the property owing LLC, where they lend the money and take no active management role, see your tax guy, there are a few here who may chime in. Keeping an LLC to 3 has some advanatges, so admitting an LLC adds more people to the mix. Another way is to split membership within the operating agreement with different classes of members, that will keep them in a passive situation as well. There may be no advanatage to passive status for them, may not be an issue, no idea.

    Have the family get to the bank for lending, you don't need to ask for financials. You and they will likely give a personal guarantee for any loan, so the difference will be in commercial lending guidlines.

    Since you are immediate family members, you'll be exempt from SEC fund raising issues as well as the SAFE Act if say your father makes you a loan personally if your home is included in all this.

    Yes, your LLC needs to be formed prior to purchase and applying for the loan, I suggest you spend a few bucks and see an attorney in setting this up, there are options and aspects of such an entity that simply are not contained in some internet LLC formoperating agreement.

    IMO, :)

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y
    Originally posted by Sergio A.:
    ...
    4) If we move a property purchased through an individual loan and then try to move it under an LLC, do we need to pay transfer tax? I’ve read yes and no, but looked through various PA and Philadelphia regs and can’t find an answer. Transfer tax in Philly is 3% and PA 1%, so this is a big impact of even considering this.

    Any help that anyone can provide is much appreciated.

    As Bill Gulley (thanks for the @mention heads up) already pointed out, that transfer will be considered a taxable event for real estate transfer tax purposes by the PA Dept of Revenue. It is a big OUCH to have to pay 4% RTT for transfers in and then back out of LLC when people try to get financing in their personal name (and then want to do a refi similarly).

    This other thread discusses PA transfer taxes, and I have some more info there that you should consider:

    http://www.biggerpockets.com/forums/93/topics/80878-transfer-taxes-on-contract-assignments

    2Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Oh, and for those who think that the transfer can be made at nominal value (like $1 or $10 or $100), the PA Dept of Revenue has a formula they use to impute a fair market value that will be the amount considered in the calculation of RTT - just because of people using nominal dollar transfers to try to circumvent payment of RTT. BTW - that same formula is also used to set the RTT on sheriff sales, since those are almost always bought well below "fair market value" (but since that formula used doesn't take into consideration the usually terrible condition of properties in sheriff sale, it's not a true reflection of actual market value of such a purchase - but that's another topic altogether).

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  • Sergio AltomarePro Member
    OP
    Rental Property Investor · Greater Philadelphia · Member since 2012 · 135 posts · 60 votes
    13y

    Bill Gulley, Steve Babiak Wow, becoming an investor/broker in PA seems like a nightmare! No wonder why so many people I know just buy properties in their own name or stick to flips.

    I'm still getting up to speed with real estate taxonomy, so I will need some time to digest the info, but it sounds like the easiest (at least from a legal and tax standpoint) is to start the LLC first, then get the loan. I understand that this is going to be a commercial loan, so is it going to be a huge challenge to get, or just going to require dealing with less than optimal terms?

    I don’t mind putting in the elbow grease to get this thing going, but I don’t want to have to try to explain to potential investors the creative ways around taxes. I want to operate this business on the up and up.

    Anyone know of a good attorney to talk to for doing business in the Philly area?

    Thank you all so much for your help, you guys are awesome!

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