I founded an LLC a few months ago because I wanted to turn my investing into a real business instead of a side hobby. My tenants now submit their monthly rent into my business account but lenders are not allowing me to use those funds to purchase more properties. The main issue seems to be because I don't have 2+ years of business tax returns. Does anyone have further insight on this and ways to get around this? Do you just buy properties using funds from a personal account?
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
7y
I don't know, but I had no idea that LLC income could be discounted by a lender. I rely on my rental income for financing, so I'm REALLY glad I saw your post before putting properties into an LLC!
I'm interested in this topic as well. I hear pundits all over the place (including here) saying that you must "have" an LLC, including for STRs, but then the guys at BP say that no bank will lend to an LLC for first time investors AND transfering to an individually owned property to an LLC violates the due on sale clause. I would love someone to explain the apparent contradiction. And, by the way, I'm an atty. so I have some knowledge of the liability issues here.
I have purchased several properties with rental income from other properties. The only thing is when lenders look at your DTI they will count 70-85% of the gross rents.
I would speak to the lender with your concerns or find another lender.
So I have been able to use rental income to buy a property in the past but now the big issue seems to be with me putting my funds into a business account. It almost seems like if I were to keep all my profits in my personal savings account then it would be an easier process buying another property as opposed to putting the money in a business and buying using the business account.
Specialist · Earth 2.0 · Member since 2019 · 598 posts · 271 votes
7y
Speak to your cpa and attorney as not legal or tax advise but have gone the llc route. Next I would find another bank, you want a bank that is a problem solver not problem creator as there are enough problems in real estate.
Hey @Cameron Tope, when you say your properties are in your LLC, does that mean the LLC is the Owner of the property but your name is under the mortgage?
Hey @Cameron Tope, when you say your properties are in your LLC, does that mean the LLC is the Owner of the property but your name is under the mortgage?
I founded an LLC a few months ago because I wanted to turn my investing into a real business instead of a side hobby. My tenants now submit their monthly rent into my business account but lenders are not allowing me to use those funds to purchase more properties. The main issue seems to be because I don't have 2+ years of business tax returns. Does anyone have further insight on this and ways to get around this? Do you just buy properties using funds from a personal account?
There's not much you can do if your LLC is only a "few months" old as you wrote because 1) you haven't filed a tax return for the business and 2) you probably haven't paid yourself a "Distribution." Once your business is more established - time wise - then you can take the Distribution as a payment into your personal account, which the lender will see on your personal tax return as reported on a K1.
I'm interested in this topic as well. I hear pundits all over the place (including here) saying that you must "have" an LLC, including for STRs, but then the guys at BP say that no bank will lend to an LLC for first time investors AND transfering to an individually owned property to an LLC violates the due on sale clause. I would love someone to explain the apparent contradiction. And, by the way, I'm an atty. so I have some knowledge of the liability issues here.
BP members are evenly split 50-50 regarding the "Due on Sale" clause issue and most of the feedback you're going to get is opinion. He's my opinion regarding this issue, as I've written on other posts;
The lender can exercise the "due on sale" clause if the name(s) of the buyer are not the same name(s) as the members identified as the owners of the LLC. For clarity; as with a trust, lenders do not exercise the "due on transfer/sale" clause when real property is transferred to the SAME individuals in an official capacity (e.g. Joe and Jane Smith as trustees of Smith Trust). Typically, the same applies to LLCs where you and your spouse are sole members (single or multiple member LLC).
If you take out a mortgage personally and transfer the property to your LLC that you control, you should be exempt. Also, if your loan was conventional; Fannie Mae recognizes the legitimacy of a QC between the mortgage holders and the LLC so long as the LLC is controlled by the borrowers;
If the property was owned prior to closing by a limited liability corporation (LLC) that is majority-owned or controlled by the borrower(s), the time it was held by the LLC may be counted towards meeting the borrower’s six-month ownership requirement. (In order to close the refinance transaction, ownership must be transferred out of the LLC and into the name of the individual borrower(s). See for additional details.)
Regardless, you should always talk to your lender and tell them exactly what you’re planning and get their approval.
Next is to check with the Title Company regarding the Title insurance. Generally, the coverage of the policy will state; “The coverage of this policy shall continue in force as of Date of Policy in favor of an Insured after acquisition of the Title by an Insured or after conveyance by an Insured, but only so long as the Insured retains an estate or interest in the Land, or holds an obligation secured by a purchase money Mortgage given by a purchaser from the Insured, or only so long as the Insured shall have liability by reason of warranties in any transfer or conveyance of the Title.” Again, as with the question regarding the lender mentioned above, its best to ask your Title company if the insurance coverage remains intact if the asset is transferred.
Unlike you, I am not an attorney, but this is what my attorney advised who specializes in real estate law.
Hey @Cameron Tope, when you say your properties are in your LLC, does that mean the LLC is the Owner of the property but your name is under the mortgage?
When you QC a property into a LLC the mortgage stays with the original borrower. It does not transfer. If you borrowed $100,000 from xyz lender to buy a property then transfer the property to the LLC the loan stays with you personally.
Mortgage Broker · Dallas, TX · Member since 2017 · 657 posts · 275 votes
7y
@Steven Destine the issue seems that you are going with a traditional lender. Conventional lenders normally want to any course of income, rent included, to have a history of “normally” 2 years or more. This means taxable income that is being claimed.
There are plenty of lenders out there though that offer other products that do not have this requirement.
Attorney · Austin, TX · Member since 2014 · 1k+ posts · 932 votes
7y
@Steven Destine, looks like you have advice on this topic so I don't want to pile on. I did post an article about the LLC lending problem that provides a strategy to accomplish this. Check out my other Bigger Pockets articles if any of this makes sense.
King Of Prussia, PA · Member since 2019 · 22 posts · 0 votes
7y
@Cameron Tope
So I don't even have an LLC. what I do have is the time to look and find deals. I'm afraid because I'm unsure what questions to ask , because I don't have a ton of savings to put into a property but what I do have is a 726 credit score. So my question is how to I go about putting in offers when I have no money but fair credit.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
@Malik Eleby Take on a partner to get started. That's exactly what I did, no downpayment (DP) funds but good credit. The partner put up the DP and I put the loan in my name, and we split everything 50/50. Worked for us.
I founded an LLC a few months ago because I wanted to turn my investing into a real business instead of a side hobby. My tenants now submit their monthly rent into my business account but lenders are not allowing me to use those funds to purchase more properties. The main issue seems to be because I don't have 2+ years of business tax returns. Does anyone have further insight on this and ways to get around this? Do you just buy properties using funds from a personal account?
There's not much you can do if your LLC is only a "few months" old as you wrote because 1) you haven't filed a tax return for the business and 2) you probably haven't paid yourself a "Distribution." Once your business is more established - time wise - then you can take the Distribution as a payment into your personal account, which the lender will see on your personal tax return as reported on a K1.
Correct me if I'm wrong but thought if you're the sole owner of the LLC that has a rental business, for tax return purposes the LLC is ignored and you file on Sch E of your return? There is no "business tax return"
I founded an LLC a few months ago because I wanted to turn my investing into a real business instead of a side hobby. My tenants now submit their monthly rent into my business account but lenders are not allowing me to use those funds to purchase more properties. The main issue seems to be because I don't have 2+ years of business tax returns. Does anyone have further insight on this and ways to get around this? Do you just buy properties using funds from a personal account?
There's not much you can do if your LLC is only a "few months" old as you wrote because 1) you haven't filed a tax return for the business and 2) you probably haven't paid yourself a "Distribution." Once your business is more established - time wise - then you can take the Distribution as a payment into your personal account, which the lender will see on your personal tax return as reported on a K1.
Correct me if I'm wrong but thought if you're the sole owner of the LLC that has a rental business, for tax return purposes the LLC is ignored and you file on Sch E of your return? There is no "business tax return"
The OP didn't clarify if he's the sole owner of the LLC. My mistake in assuming if he is. Most posts on BP regarding LLCs are referring to two members and I replied based on that assumption. A two-member LLC may choose to file as a partnership using a Form 1065. A single member LLC is considered as a Disregarded Entity in the eyes of the IRS.