Financing a LLC in Minnesota

18 Replies

Hello BP community! I am just starting out my real estate investing journey and need help with recommendations for financing. My plan is to use a LLC to own a rental property. From my understanding (and please correct me if I'm wrong, I appreciate any help) I need to get a commercial loan since I'm using a LLC. Please give me any recommendations for mortgage lenders in Minnesota that could help me out with this. Thanks!

May I ask why you're going with an LLC right off the bat? We're all biased to our path to a certain extent, but I don't see how utilizing an LLC outweighs the benefits of getting into your first property with a lower interest rate, 30 year fixed mortgage, and much lower down payment. I took out a 1 million dollar umbrella policy which costs about $150/yr and probably nets out to around $100 or less when considering the small savings on my auto insurance plan that goes with it.

If you're deadset on the LLC/commercial route, I've heard good things about Bridgewater Bank and Community Resource Bank - have yet to work with either of them though.

@Derek Olmschenk welcome to BP! I would advise against buying in an llc. You can always buy in your personal name and quit claim into an llc. Could trigger the due on sale clause but extremely rare. Would love to connect and see how I can help you on your investing journey!

An LLC is a tool to use for a number of reasons. Buying your first property is not one of them! Don't believe the horror stories about liability - as mentioned before, you can insure against most of that. One single family home as a rental does not require an LLC. If you were buying something a lot larger, an LLC would be a must. Message me if you want to know more. I've been a LL for almost 20 years now. PS-my properties are in a trust but that's because of my personal situation and choices.

@Derek Olmschenk it is true that you can not get a conventional loan in the name of an LLC, but there is a way to do it correctly after closing. I'm not sure it's necessary. I find many new investors spend too much energy worrying about LLCs and other extraneous details. The most important thing is to find a great deal. This is where your energy should be focused IMO. @John Woodrich has some great advice on this but he's a CPA busy with tax season so you should set a meeting with him after April 15.

Good advice above. Feel free to reach out to me after 4/15 and we can get on a call to quickly discuss if you are still unsure. As Tim mentioned many people get stuck on this, it may make sense for some people to put the property into an LLC off the bat but for many it may not matter as much.

@Derek Olmschenk

1. This is the non recourse lenders that I know of although haven’t work with them personally. First Western Federal, Marshal Reddick, First National Bank of America, Pacific Southwest Reality Services.

2. You are right, you need commercial loan for LLC but will have on average higher interest. If you keep properties in your name you will have chance to use residential loans with lower interest.

3. I would advise against quit claiming property to LLC which you bought in your name with residential mortgage. In fact, get a lawyer/professional help to set up asset protection entities. Unless your LLC is run properly, you won't have a corporate veil.

4. Consider Umbrella insurance. IMO it's not either LLC or Umbrella insurance. Active investor should have both. In fact I would advise getting insurance policy first and then consider at what point do you need to add LLC to you asset protection strategy. How early you need to open LLC is up to you and your business strategies. Find a good lawyer.

This is not a legal advice and I am not a lawyer, I have no right to give legal advice to anyone. Just my 2 cents.

Best of luck

Originally posted by @Evan Kraljic :

May I ask why you're going with an LLC right off the bat? We're all biased to our path to a certain extent, but I don't see how utilizing an LLC outweighs the benefits of getting into your first property with a lower interest rate, 30 year fixed mortgage, and much lower down payment. I took out a 1 million dollar umbrella policy which costs about $150/yr and probably nets out to around $100 or less when considering the small savings on my auto insurance plan that goes with it.

If you're deadset on the LLC/commercial route, I've heard good things about Bridgewater Bank and Community Resource Bank - have yet to work with either of them though.

I felt like it was the only option that I know of for my plan. The goal is to work with my parents for my first few rental properties (they will supply more of the down payments and I will be in charge of finding and managing the properties). The LLC would allow me to access the down payments without having my parents pay gift tax, keep the finances of the property separate from any of our personal finances, and ultimately reduce our liability. Let me know if there is another option to get around some of these hurdles. If it is just me investing into the rental property, then I could see where an LLC might not be necessary. However, I could probably only do 5% of the down payment of most places. Thanks for the help!

 

@Derek Olmschenk

We only do LLC financing. You can finance anywhere in the continental United States and 10 countries. With 30 lenders at our disposal you should be able to find something that works for you your family and your business.

@Derek Olmschenk based on those circumstances then you should look to commercial loans.  @Nino G. It's a common misconception that getting a commercial loan does not count against the 10 financed properties limit for conventional loans.  While commercial properties are excluded from the 10 properties limit the guideline does not distinguish between th loan type used to finance the property.  If it's a residential property and it has a loan where the borrower is obligated it counts against the cap.   If the loan is non-recourse then it would not be guaranteed but lenders rarely give those to new investors with massive down payments.  Here's the guideline.

https://selling-guide.fanniema...

Limits on the Number of Financed Properties

The following table describes the limits that apply to the number of financed properties a borrower may have.

Subject Property OccupancyTransactionMaximum Number of Financed Properties
Principal residenceTransactions other than HomeReady loansNo limit
Principal residenceHomeReady loansDU and manually underwritten - 2
Second homeInvestment propertyAllDU - 10, Manually underwritten - 6

Exception: High LTV refinance loans are exempt from the multiple financed property policies. See B5-7-01, High LTV Refinance Loan and Borrower Eligibility for additional information on these loans.

The number of financed properties calculation includes:

  • the number of one- to four-unit residential properties where the borrower is personally obligated on the mortgage(s), even if the monthly housing expense is excluded from the borrower's DTI in accordance with B3-6-05, Monthly Debt Obligations
  • the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Fannie Mae (a multiple unit property counts as one property, such as a two-unit);
  • the borrower’s principal residence if it is financed; and
  • the cumulative total for all borrowers (though jointly financed properties are only counted once). For HomeReady loans, financed properties owned by a non-occupant co-borrower that are owned separately from the borrower are excluded from the number of financed properties calculation.

The following property types are not subject to these limitations, even if the borrower is personally obligated on a mortgage on the property:

  • commercial real estate,
  • multifamily property consisting of more than four units,
  • ownership in a timeshare,
  • ownership of a vacant lot (residential or commercial), or
  • ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

Examples — Counting Financed Properties

  • A HomeReady borrower is purchasing a principal residence and is obligated on a mortgage securing an investment property. A non-occupant co-borrower is solely obligated on mortgages securing three investment properties. In this instance, the transaction is eligible for HomeReady, as the occupant borrower will have two financed properties. The non-occupant co-borrower’s financed properties are not included in the property count.
  • The borrower is personally obligated on mortgages securing two investment properties and the co-borrower is personally obligated on mortgages securing three other investment properties, and they are jointly obligated on their principal residence mortgage. The borrower is refinancing the mortgage on one of the two investment properties. Thus, the borrowers have six financed properties.
  • The borrower and co-borrower are purchasing an investment property and they are already jointly obligated on the mortgages securing five other investment properties. In addition, they each own their own principal residence and are personally obligated on the mortgages. The new property being purchased is considered the borrowers' eighth financed property.
  • The borrower is purchasing a second home and is personally obligated on his or her principal residence mortgage. Additionally, the borrower owns four two-unit investment properties that are financed in the name of a limited liability company (LLC) of which he or she has a 50% ownership. Because the borrower is not personally obligated on the mortgages securing the investment properties, they are not included in the property count and the result is only two financed properties.
  • The borrower is purchasing and financing two investment properties simultaneously. The borrower does not have a mortgage lien against his or her principal residence but does have a financed second home and is personally obligated on the mortgage, two existing financed investment properties and is personally obligated on both mortgages, and a financed building lot. In this instance, the borrower will have five financed properties because the financed building lot is not included in the property count.

I am joining the non-LLC side of the argument.

You do make some valid points with saying you want it in order to separate finances and provide liability protection but there are other ways to do this as well. 

I just set up a bank account the other day for a property that I have in my personal name. For banking purposes i set up as a DBA (Doing Business As) and that is what I opened up my account under. I just went down to the city and filled out a form, and that allowed the bank to open up a business account and now I can run all my expenses/revenue for that property through that account.

In terms of the liability side of the equation, I would talk to an insurance agent and get a quote for a liability umbrella policy which will provide adequate protection if someone try's to sue you. I don't know all the nitty gritty details so talk with an insurance person if you want more info. 

I am not totally against LLCs, I just think you don't need them when you are just getting started because it just complicates the transaction and I am a fan of keeping things simple. When you start dealing with LLC's you will be seeing commercial loans that often don't offer as favorable terms as a loan that will be in your personal name ( commercial loans tend to be 15-20 yrs and higher rates while personal loans will be standard 30 year with lower rates).

I hope this was helpful, feel free to message me if you have any other questions.

-BA

@Tim Swierczek thank you for the useful info. I didn’t know that information, so honestly grateful for that.

But mortgage count was not what I was referring to when I cautioned about taking personal loans for the LLC, but the corporate veil. My understanding is that a lot of investors want to have properties in LLC for the legal protection it offers. However, having an LLC doesn't in itself guarantee corporate veil, unless the company and any loan it has is structured and run properly. According to LLC laws.

As mentioned previously, I am not a lawyer and I am not giving out legal advices. This is just a word of cation against the attitude of freely mixing personal and LLC business and thinking you still have the legal protection.

In my personal opinion, if a new investor can't yet afford a lawyer, legal advices and LLC expenses, then sole proprietorship with umbrella insurance coverage for personal liability is a better business model than self improvised LLC.

@Nino G. Got it. I misunderstood based on point #2. I agree with your assessment including your comments about an umbrella policy. One issue that people almost always forget when they transfer ownership to an LLC is to change their insurance. Since the LLC is the new owner it is the entity that needs to be the named insured. There is a concept in insurance that says the policyholder must hold an "insurable interest." Transferring ownership without updating the insurance could leave the property uninsured, but at least it will be in an LLC.

I am about to close on my first property. Where I am from (STL) you are correct in the sense that I could not get a conventional mortgage on a rental as an LLC. I bought a 4 family and am going to owner occupy one unit. I financed it with an FHA loan and plan to just have an umbrella policy as a safety net alongside my standard liability that comes with my insurance.

I decided to go that route because the terms on a conventional mortgage + low FHA down payment outweighed the commercial lending options.

If you have any questions about the legalities of a rental, I would contact a lawyer and run all this by them.

Good luck!

@Tim Swierczek this is a great example you brought up. As I said, people mistakenly thinking corporate veil is there just because you have an LLC.

Here is an extra point I will offer on that example. You mentioned that people forget to transfer ambrella insurance in the name of LLC, but then you said, that leaves LLC without ambrella coverage but at least you have LLC.

If I was going after that LLC and the owner in court, I would use that ambrella coverage which is in the personal name of LLC owner yet supposed to insure the address of the LLC owned property as an evidence of mixing LLC and personal business and ask the judge to consider corporate veil pierced. Would that work? I don't know, I am not a lawyer. However, that kind of mistake could not only leave your property without umbrella coverage, but without LLC protection as well.

Which is why I oppose any sort of self managed LLCs without lawyer involvement. Keeping corporate veil is a tedious work and devil is in details.

*just like before, this is not a legal advice.

@Nino G.  I'm not an attorney and I certainly do not know the answer.   Maybe my attorney @Brad Schaeppi can answer for us. On another note, I was kidding about he at least they have an LLC comment. I think too many beginners worry about LLC's and other not essential issues and forget the main goal is to find a deal that will generate income and wealth. They take their eye off the prize so to speak.

@Tim Swierczek got it. Sorry it’s easy to misunderstand written text.

And agree with you. I personally am the new investor, and my current structure is sole proprietorship with insurance. And I will follow my advice that when I have assets worth enough to justify headaches of LLC, I will get best lawyer I can find to structure and run it.

You could say my short term investment goal is to grow big enough to require LLC :)