LLC Partnership - Best Way to Finance Property?

Question

Hey Everyone!

My friend and I located in the Austin, TX area, and have recently formed an LLC in Texas to begin our Real Estate Investing venture together. We both have enough funds and credit score to finance our first investment property, but we were stumped on how to best go forward with financing.

A little background info: I will be planning on living in the house, and we will rent out the other rooms.

For tax purposes, we will run all numbers through the business and split the profits at the end 50/50 (we have already agreed, however, that we will place that money right back into the LLC).

Do we apply for a business loan? Is it possible to buy it using a FHA loan? What are the tax benefits and downsides of each? Or do we just buy one in cash outright? Any help or guidance would be greatly appreciated.

Thanks,

Aaron

Lien Vuong · Answer

If you're owner occupying you can use FHA loans with low $ down but you cannot put that into an LLC as it's not allowed be a place of business. Alternatively you can use commercial loan and buy it as a an LLC but higher interest rate as well as 25% down payment.

There are protections on both financing methods, it's best if you assess what you have for reserves and start from there and then reach out to some lenders on your qualifications.

Bryan Noth · Answer

@Aaron Vu congratulations on taking those first steps and getting your LLC established. I would suggest doing some digging here on the BiggerPockets forums regarding the LLC strategy, this has been discussed on several occasions and there is great information out there.

Talk with you lender about the acquisition strategy. The owner occupied rate and terms are typically not applicable to an entity loan and I would run some numbers for both approaches. You can transfer the property into the LLC but also want to chat with your lender about any ramifications for going that route as well.

If you are running your business model through the LLC that is an entirely different story and likely a question better suited for your CPA to maximize tax benefits.

Stephanie P. · Answer

Rather than going in as a partnership, try buying it separately to leverage your maximum number of properties financed using conventional money down the road. You would be the most likely candidate because you're going to occupy the property and in turn get the best financing options.

Aaron Gordy · Answer

@Aaron Vu A business loan will more than likely have shorter terms and higher interest rate than a longer term conventional or fha. You can do a conventional loan with 30 year amortization through an llc. The loan will more than likely have personal guarantees in place. I have seen conventional loans with 10% down payments. I had one lender tell me about a 5% down conventional loan with an llc. I would suggest a good well connected mortgage broker to consider the pros and cons of the strategy.

The tax implications could be big too. I would suggest talking to a good cpa or cpa firm. The consultation fee will be money well spent and probably save you multiples of the outlay in tax savings.

You could always do fha financing too. There are programs in place, if you are a first time home buyer, that would allow you to do a zero down purchase. A simple partnership deal would work here. I think Fannie Mae may have some suitable programs but its not fha. Chat with a mortgage broker.

You might want to chat with an attorney too, if drawing up an llc. Attorneys may save you from a nightmare of a deal and keep a friendship. I am not saying that the deal could go bad but you need to be prepared for the positives and the negatives. Its best to measure twice and cut once.

There are a number of strategies that you could utilize, it seems. First step, is probably a good conversation with a good mortgage broker.

I hope that helps.

Basit Siddiqi · Answer

@Aaron VuYou would likely need to connect with a portfolio lender/commercial lender to get financing through an LLC.Portfolio lenders normally have more stringent lending rules than conventional financing.They will normally require each of the members to personally guarantee the note.

Jordan Moorhead · Answer

@Aaron Vu I would recommend both buying FHA separately and then entering into a partnership afterwards. I know it sounds fun to start as a partnership but if you both start with buying properties you'll have more leverage to ultimately have a successful partnership long term. Plus you'll have more property! It doesn't really make sense to partner on owner occupied properties when you can do those on your own for 3.5% down.

Stephanie P. · Answer

Great idea for a non owner, but won't work for an owner occupied property.

LLC Partnership - Best Way to Finance Property?

LLC Partnership - Best Way to Finance Property?

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