Rental Property Investor · Bloomington, IL · Member since 2015 · 48 posts · 8 votes
Question - would love to get a lender's perspective on this...
We have 3 partners that each own a 1/3 interest in our "rental business", but we do not have a formal partnership agreement or an LLC or a Corp set up. So, in effect, we treat it as 3 cooperating sole proprietors.
Now we are looking to take on more debt to expand and buy a bigger, out-of-state multi-unit property. We've had all of our existing properties cash flowing for more than 1 year, so we can show ongoing "business" profits, but how will lenders look at this?
Without a LLC or Corp, will the lenders evaluate the loan request based our individual credit? or will they take into account our good track record?
disclosure: I am not a CPA or a tax attorney. Seek professional advice before making these kinds of decisions.
Having said that, we only lend to entities and I think, before you go too much further with the partnership, look into an LLC to limit the liabilities of each member rather than open up your personal assets to potential (frivolous or not) down the road. With an LLC, your exposure is only the personal assets you've put into the entity rather than all of your personal assets. There is virtually no tax incentive because it's treated as a pass through entity, but if you do it right and separate personal from business, there is at least that level of insulation.
In addition to the credit of the individual members of the LLC or partnership, many lenders look for a track record (that really only means that you've been doing it for a while). On the other hand, lots of lenders don't look at income (which means the track record really doesn't mean much to them) and only the credit and the value of the property. It just depends on the lender. For some, you'll get an LTV hit for first time investor, for others you'll be okay because you can trace the LLC back to other properties with the HUD's.
The level of scrutiny (underwriting income etc...) dictates the rate so a no income product will be less expensive than a full doc loan, but a recent LLC may trigger a denial because it's less than 2 years old. Hard to tell.
disclosure: I am not a CPA or a tax attorney. Seek professional advice before making these kinds of decisions.
Having said that, we only lend to entities and I think, before you go too much further with the partnership, look into an LLC to limit the liabilities of each member rather than open up your personal assets to potential (frivolous or not) down the road. With an LLC, your exposure is only the personal assets you've put into the entity rather than all of your personal assets. There is virtually no tax incentive because it's treated as a pass through entity, but if you do it right and separate personal from business, there is at least that level of insulation.
In addition to the credit of the individual members of the LLC or partnership, many lenders look for a track record (that really only means that you've been doing it for a while). On the other hand, lots of lenders don't look at income (which means the track record really doesn't mean much to them) and only the credit and the value of the property. It just depends on the lender. For some, you'll get an LTV hit for first time investor, for others you'll be okay because you can trace the LLC back to other properties with the HUD's.
The level of scrutiny (underwriting income etc...) dictates the rate so a no income product will be less expensive than a full doc loan, but a recent LLC may trigger a denial because it's less than 2 years old. Hard to tell.
Lender · Costa Mesa, CA · Member since 2017 · 51 posts · 19 votes
9y
you will get a better deal if they lend to you individually instead of lending to the LLC (lower costs, lower rate)
The advantage of financing the property in the name of the LLC is that properties in an LLC do not count against the '10 property financed rule' from FNMA. There are certain lending restrictions once you are individually liable for more than 10 financed properties
Question - would love to get a lender's perspective on this...
We have 3 partners that each own a 1/3 interest in our "rental business", but we do not have a formal partnership agreement or an LLC or a Corp set up. So, in effect, we treat it as 3 cooperating sole proprietors.
Now we are looking to take on more debt to expand and buy a bigger, out-of-state multi-unit property. We've had all of our existing properties cash flowing for more than 1 year, so we can show ongoing "business" profits, but how will lenders look at this?
Without a LLC or Corp, will the lenders evaluate the loan request based our individual credit? or will they take into account our good track record?
Jacksonville, FL · Member since 2015 · 183 posts · 22 votes
9y
Before you get into financing, the corporate structure is a recipe for trouble... 3 partners in a rental business, no LLC, written agreement of any sort or attempt to ensure personal liabilities don't place at risk business assets... and you are thinking about taking on more debt and to expand acquisitions to include out-of-state multi units?
Rental Property Investor · Bloomington, IL · Member since 2015 · 48 posts · 8 votes
9y
Thanks all, hear you loud and clear. We've met with a local atty to discuss LLC vs S-Corp, and we were advised to hold off a couple months to see how the potential Trump tax reform might impact our tax situation (i.e., perhaps it would be better to incorporate to get a lower tax burden?)
Any thoughts on the Trump tax reform and how it might affect the business structure? Is it foolhardy to wait? If corp tax drops to 15% that might be worth the wait...