Aurora - Non-Warrantable Condo

7 Replies

Hi All,

My family and I moved from California to Colorado in December of last year. We are enjoying everything Colorado has to offer and are ready to start investing in real estate! We are currently under contract for a rental condo (2bd 2ba at 1,125 sq ft) in Aurora. We just found out that there are more tenants than owners living in the complex so our lender will not loan since it's non-warrantable. We did find another lender willing to do a 15 year fixed rate loan at 3.75% but requires the Buyer to be an LLC, put a minimum down payment of 25% and provide a personal guarantee. The rate is actually better than our first lender but we will have to pay an additional $6k down (25% vs 20%). We have the funds to pay the 25% but wondering if 1) 25% down is too much to commit on one property 2) if it was necessary to establish an LLC for just one rental property? Thank you in advance for any thoughts on this matter!

Oliver

I don't think that's an awful deal as the rate is reasonable.  I would be careful to make sure with a 15 year note, your unit still cash flows as you're payment will be higher.  To address a few of your points:

LLC: I would recommend setting up an LLC for one project anyway. If it's a family investment, I would recommend setting up a single member LLC (one owner who is also the manager, usually yourself), which allows you to skip the separate partnership return and you can keep the operating agreement simple. I've done it frequently and in the state of Colorado it's super easy. Takes about 5 minutes online through the Secretary of State's website and costs $50 one time with $10 renewals annually. Second step, while not required, I would get an EIN from the IRS. No charge for that and again can be done online in 5 minutes. Just search for Federal EIN. The reason to get this is to declare the LLC a single member. Third step would be to draft an operating agreement. Others might disagree, but if you're a single member LLC , the operating agreement can be simple and done without an attorney.

Also a note on the personal guarantee. If you're buying the property outside an LLC, in your own name, you are in effect providing a personal guarantee anyway because your personal assets would not be shielded by the LLC.

Understand that I am not an attorney or accountant, but have been living this for a number of years.

Hope this help,

Rob

It sounds decent, but there are several lenders in the Denver area that do non-warrantable, so you might want to shop a bit more (Compass bank, Elevations CU, Vectra?). They will all require a personal guarantee, I would think. 

Don't know abut downpayment, but  20% is probably the best you'd find. As to your question of whether 25% is too much to commit: It's really just a matter of whether the deal still meets your criteria for returns with the extra cash tied up.

Personally, I would not bother with an LLC for the one property. But that's just me.

This sounds like a pretty decent deal.  I'd be a bit worried about cash flow with a 15 year loan as well, but if it works for you, I think everything else looks good.

There's also no need to pay a bunch of money to get the LLC set up. If it's just you (or you and your spouse), then you just need a basic Operating Agreement for the LLC, which you can create yourself using the website rocket lawyer. (I am not affiliated - I'm just a user)

Next, go to the Colorado Secretary of State's website, Click on Business Organizations and then File a Business Document.  The fee is $50.

Next, go to the IRS' website and type EIN into the search bar in the upper right hand corner.  Your first return should be the link to Apply for an EIN online.  

That's it, easy peasy.

Thanks for the information Linda! We looked at quite a few properties and this one worked for us on a 15 year term. We plan on managing this property ourselves. I'm sure at some point we will look into property management once we build up our portfolio.