Purchasing Duplex - Multi-member LLC Mortgage

[Daniel Watts]

Hey BP,

I am part of a 3 member LLC that is currently under contract on a duplex we plan to buy and hold as a non owner occupied rental property. This is our first property and as we start looking at the financing options we have some questions...

Option 1) Take title as 3 individuals and they want 25% down on a 30yr fixed. - I understand that we have the option to move the title into the LLC. What does that process look like? Is the risk of being called due higher if we live in a very small rural area? And, is there a penalty for being called due other than just finding a new financing option?

2) If we purchase as an LLC the bank wants 35% down for 30yr, 5/1 ARM or 7/1 ARM and personal guarantees.

***Sidenote - 35% down will mean that two of the partners will have to put more cash down to cover the third. Any ideas for helping the 3rd partner get to equal ownership? 

Is one of these more favorable than another for new investors looking to make our first investment as straightforward and predictable as possible, while also trying to protect ourselves, our investment, and ourselves FROM our investment?

Any input is helpful!

Thanks

[Scott Smith]

Hey Daniel,

I would mention option C, which I see many investors doing. This option is the synthesis of both A and B, and it is made possible because of the Land Trust. You would purchase the property following the steps in option A, but then transfer the property into a Land Trust, which is an exempted transfer from the Due on Sale Clause because it is an Inter Vivos Trust (an estate planning tool) and protected by the St Germain Act, before assigning the LLC as as the beneficiary of the Land Trust. The Land Trust holds the property and allows you to assign the trustee(s) [managers,] and the beneficiary. You can use the LLC to establish the partnership rules by way of the operational agreement and benefit from it's liability protection by assigning it as as the beneficiary.

This article has more on the topic.

Let me know if you have more questions about it. It's been a long day, so I may not have explained it very clearly! Best of luck to you moving forward with your partnership!

[Maxwell Fontaine]

Hey @Daniel Watts, 

Just from an insurance perspective you will need to be prepared to put an individuals name or all of your names as property insureds and the LLC as a co-insured.

If the extra payment of capital means you have "more skin in the game" you might want to allow them to not have their name on the insurance or if you have more skin in the game than you get to get the insurance in your name. IF THAT NEEDS TO BE DONE. That might scare off the idea of having a higher percentage in the deal depending on how you present it. 

That also applies for your builders risk insurance policy if you are rehabbing and it is vacant. 

If you need me to clarify anything or have any questions, feel free to reach out. I am here to assist you.

[Stephanie P.]

@Daniel Watts

You should be able to go 80% ltv if you're looking at a 1-4 unit property. There are ways to structure the LLC to maximize your ltv.