Question: Commercial Financing for Small Portfolio - Difficulties

[Richard Clark]

Narrative

So about 2.5 years ago we started our company. It was created for the purpose of performing in real estate investment. It was created as a C-corp (not an LLC which is oddly relevant) and well funded. The first properties were purchased within 6-mo. The loans were (and had to be) individual residential loans but at investor rates. Residential loans are offered largely based on the Debt-To-Income (DTI) ratio of the principle, thus, only so many properties can be purchased with these types of loans. We got up to 3 parcels with 6-doors, all positive cash flowing. During this time we also paid cash for one of the properties (which we didn't want to do) because, financing options through banks had collapsed due to DTI.

The company did its first corporate tax return for 2018 (IT'S ALIVE!...yay!)

The following year (2019), rents were collected, properties self-managed, all was well for most of the year, bad 4th quarter though with move-outs and some unscheduled repairs. Nevertheless at the end of 2019 I purchased a property for 8K and flipped it for 30K this year (2020) just before COVID. 

The company did its second corporate tax return for 2019

So here we are with properties all cash flowing, two with mortgages, one with no mortgage. For the sake of discussion, let's look at some numbers quick:

Property-1: 4-unit - Cash Flow ~ $1500 CoC = 85.9% with one deadbeat tenant / 147% full paying. Debt service is easy here as 1.3 units support total debt service.

Property-2: 3/2 Townhome - Cash Flow ~$700 CoC = 65.8%

Property-3: 3/1.5 Townhome - Cash Flow ~$1300 (No mortgage) - Owned by the company

So here's what I want to do:

Refi Properties 1 and 2 into individual commercial loans (not a portfolio) under the company name getting them out of our individual names and pull the cash out of the one we own outright. Unless I'm missing something, this seems simple and reasonable. I'm not asking for money to buy anything, just restructuring my existing loans to further legitimize the business for credit purposes on the properties I already own and free up our individual credit.

Am I missing something here? Why is it so difficult getting a bank or mortgage broker to refinance our properties? Returns are great with history, properties are B-class, credit is good, what's the problem? We've been denied twice when we tried this a year ago and it was because the company didn't have 2-years tax returns. No denials yet this year but here's what we've been told so far?

- Local Bank: "Well, you're showing a loss for last year. We never heard of anyone doing this into a C-corp. I think we prefer it be an LLC. We'll have to see what the Underwriters say." My response: What company do you know of that doesn't show a loss in its first 5-years of existence?! That's just good tax strategy. Why does the type of entity matter? (He wasn't sure).

- Quicken Loans told us that they don't work with C-corps at all but they'll work with LLC's. - Huh?

We're waiting to see what happens and I'll update on this post. I understand and have learned a lot about the difference between residential and commercial loans enough to know that with my numbers, this should be a no-brainer. 

Any thoughts, recommendations or suggestions are appreciated.