Dallas, TX · Member since 2014 · 31 posts · 19 votes
Hi all!
Love this site and the members!
Question: My friends and I bought a rental house 3 years ago and it's going fine. We want to refinance into a 30 year fixed note. Is this possible?
I'm told that we can't get agency debt on a property owned by an LLC. We have a lender that has advised us to switch the title to one of the LLC member's individual name, get agency debt (30 years, 3.25%), and then switch title back to the LLC after one day. He said technically their is a due-on-sale clause but they are never activated(he also mentioned that a year ago the rules changed in favor of doing this method).
I guess my biggest question is, is this unethical? I want to be above reproach in all that I do.
This "LLC-thing" comes up daily on BP. Search around, even look at some of my posts (i've got tons of them..).
If/Since you are investing with a LLC (which you pretty much need to since you are investing with non-spousal parties), you need to pay for it. This includes the asset protection.
Entities are not eligible for conforming residential loans. You need to obtain commercial financing. So, when you talk to the majority of loan officers whom are residential loan officers, they are going to tell you to deed Title to a person so that they can sell you a loan. They don't care about your corporate veil...
If you don't care about the asset protection, there really isn't much "wrong" with deeded to a personal name, refi, then deed back. In my layman's opinion, you've jeopardized your corporate veil.
Its been posted that some loans (I think it was Fannie Mae) no longer have the Due on Sale clause. Supposedly CT has "outlawed" or something the clause...
So, it sort of depends on what sort of "reproach" do you care about... All around you should just get commercial financing. It will probably "solve" your problem since I think commercial loans will run you around 5% (so you probably won't be refinancing) and less favorable terms. Although its been posted there are commercial lenders that will loan on a 30yr term. If you don't care about your corporate veil, you can should probably be able to go ahead.
Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
6y
lots of threads on the forums here about transferring title. Since you asked if its ethical, ill give my opinion.
1. as far as i know, this is not really a legal issue, more of a bank rule.
2. since its a recourse loan, the guarantor of the loan doesnt really change
3. to me the ethics question boils down to the intent of the rule. i believe the intent of the rule is to prevent you from transferring title to someone else. if you did, the bank (who underwrote YOU) will no longer necessarily have the same guarantee they did before. In essence, you told the bank you would back this loan, then transferred that responsibility to someone else.
in this case, you remain "that person" who the bank has dealt with. i do not see it as unethical. im sure others may disagree.
This "LLC-thing" comes up daily on BP. Search around, even look at some of my posts (i've got tons of them..).
If/Since you are investing with a LLC (which you pretty much need to since you are investing with non-spousal parties), you need to pay for it. This includes the asset protection.
Entities are not eligible for conforming residential loans. You need to obtain commercial financing. So, when you talk to the majority of loan officers whom are residential loan officers, they are going to tell you to deed Title to a person so that they can sell you a loan. They don't care about your corporate veil...
If you don't care about the asset protection, there really isn't much "wrong" with deeded to a personal name, refi, then deed back. In my layman's opinion, you've jeopardized your corporate veil.
Its been posted that some loans (I think it was Fannie Mae) no longer have the Due on Sale clause. Supposedly CT has "outlawed" or something the clause...
So, it sort of depends on what sort of "reproach" do you care about... All around you should just get commercial financing. It will probably "solve" your problem since I think commercial loans will run you around 5% (so you probably won't be refinancing) and less favorable terms. Although its been posted there are commercial lenders that will loan on a 30yr term. If you don't care about your corporate veil, you can should probably be able to go ahead.
Dallas, TX · Member since 2014 · 31 posts · 19 votes
6y
@David M. Thanks for the detailed post. So it sounds like the main reason we shouldn't refinance in this manner is that we could lose the LLC protection. That makes sense.
So our current loan is at 6.5% on a 3 year arm (about to expire). What commercial lenders give 30 year notes? What kind of rates are you seeing. I'll do my own research, but thought I would ask what you are seeing.
Honestly, I don't really know. From other BP posts it sounds like 5% with a 20yr term on a 30yr amortization (i.e. you have a balloon payment after 20yr and the note is over) is one of the better ones. Another BP post recommended the three lenders below, I think for possibly have 30yr term commercial loans. From their websites, it looks like they are real estate specialty lenders.
Aside from these national lenders, I would definitely check out local commercial lenders and local/regional banks and credit unions. Make sure you ask for a commercial lending.
Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
6y
@Mike L. @David M. Is right, you need to consider that asset protection. I was just answering the ethical part of the question.
You should be able to find decent commercial terms pretty easily. 5% for a 10 or 15 year fixed is pretty common. 30 year fixed at 5% would be great, that matches agency debt on some of my properties. I personally haven’t found that yet. Make a list of every local bank you can find, then set an afternoon to call them all. Ask to speak to the commercial lending department, then ask what terms the offer on investment properties. If your property cash flows at the terms you mentioned, you will not have a hard time beating that
Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
6y
@Mike L. This is a question for the lawyers, but maybe you can transfer to your personal name, secure the good debt, then form a new LLC to transfer too.
If you are really worried, maybe you can structure that LLC in a holding LLC, like many of the post and books on here suggest
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
I just closed on one deal and am closing on the 2nd (touch wood) in a few days. These are “small balance” agency loans . That means they are over 1 million, but under 7.5M ... the terms are pretty flexible - i have several years IO, 10 year term with a 30 year amort at 3.77%.
I would contact a loan broker than knows how to do LLC loans. It really depends on how much loan are you talking about here whether you talk to a commercial or residential loan broker.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y
@David M. and @Mike L., Fannie Mae explicitly allows title to be transferred into a LLC after closing. This isn't an elimination of the Due on Sale Clause. Notably, Freddie Mac does not have the same allowance. I've never heard anything about CT "outlawing" the DOS clause.
Yes, I've heard that but haven't confirmed for myself. But, you also won't know where your loan will be resold on the secondary market.... Anyway, it looks like OP's issue is much more than Due on Sale... Thanks.
Insurance Agent · Des Moines, IA · Member since 2014 · 26 posts · 6 votes
6y
Agency (Freddie Mac or Fannie Mae) allowing for the purchase or refinance of investment properties held in a business entity such as an LLC. You can obtain a portfolio loan for investment properties with a minimum loan about of $500k and a minimum of 5 units. Freddie and Fannie have a minimum loan amount of $1M and 5+ units. Either of these loan types (portfolio or Agency) come with a 30-year amortization.