How are you guys securing 30 fixed rates on rental properties?

12 Replies

As I'm starting this journey I'm finding no lenders who want to go 30yrs on a single family home rental property. Am I going to the wrong sources because typically what I'm getting is 30yr ARM with a 5 year balloon/renegotiated. I am looking at purchasing these in my LLC. Would it make a difference if I bought by them in my personal name then transferred to my LLC? Any additional resources would be greatly appreciated

@Patrick Davenport

Hi Patrick! 

Typically it's more difficult to purchase through an LLC if your LLC isn't fully cash funded as you're going through the process of getting the finances of the LLC squared away. This usually means lenders are looking for a credit history of the LLC, etc. which if it's brand new is going to often run into the stumbling block of 'lack of credit history'.

You can buy the property in your name and transfer it, but you would maybe need to be careful of the loan product terms specifically as in some cases the lender might enforce a 'due on sales' clause. I don't typically find that a lot of lenders recommend using personal income, credit etc. to 'co-sign' too for the LLC loan as it can defeat the purpose of keeping personal finances apart from those of the LLC- the exception here usually being the funding. What I mean by this is if you currently own a home you could cash out refinance for example and use those funds to fund the LLC as a cash buying entity, or simply have the cash reserves to fund the LLC from the start. Usually, apart from acquisition, there shouldn't be any commingling of personal and LLC funds though. So, if you did buy in your name and then transferred, you would need to make sure that this was in line with the terms of your loan product it seems.

One option to maybe consider is the possibility of purchasing in your name (if financing through the LLC isn't doable right now with a traditional loan product and keeping yourself fully separated) and obtaining an umbrella policy - some investors do this and skip the LLC altogether, others use this in combination with LLC's. While it won't offer the separation of assets an LLC will and other LLC benefits of protection, in and of itself is more protection than simply buying in your name alone, being the co-signer of your LLC, or running into possible issues with the enforcement of a 'due on sale' clause if you transfer.

You could speak with some insurance providers in your area about how this would work, what it would cost/cover, and see if it might be a good fit for you. Another option is to get with a local REIA in your area and simply ask around to see if others are doing this, who they have used if so, or ask them about lenders they've worked with and had success in transferring real property from their personal name to that of an LLC.

Hope this helps some and gives you a little bit of an idea on how to maybe proceed! You may have other investors in your area chime in here as well as lenders that will give some profession specific advice, but this is what I can offer/suggest as an investor and real estate broker in the Hoosier state = ) 

Loans to an LLC would be commercial, and the terms of residential commercial loans usually involve a 20 or 30 year ARM and balloon payments. Fixed-rate, low-interest 30 year loans are usually for residential loans in your own name. You can do a quitclaim deed to your LLC after purchase. You wouldn't have to worry about the due on sale clause per Fannie Mae's guidelines:

*The mortgage loan was purchased or securitized by Fannie Mae on or after June 1, 2016, and

*The LLC is controlled by the original borrower or the original borrower owns a majority interest in the LLC, and if the transfer results in a permitted change of occupancy type to an investment property, such change does not violate the security instrument (for example, the 12 month occupancy requirement for a principal residence).

I will echo my peers here - go with residential and put it into your LLC transfer post closing. You'll get 30 years fixed and no balloon payments.

@Patrick Davenport

Either forgo the LLC and get a umbrella policy or you can work on negotiating a 10 year ballon. It's not 30 years but it's better then 5. Local banks are your best for that. I prefer the safety of an LLC with the 10 year. Good luck!

Originally posted by @Patrick Davenport :

As I'm starting this journey I'm finding no lenders who want to go 30yrs on a single family home rental property. Am I going to the wrong sources because typically what I'm getting is 30yr ARM with a 5 year balloon/renegotiated. I am looking at purchasing these in my LLC. Would it make a difference if I bought by them in my personal name then transferred to my LLC? Any additional resources would be greatly appreciated

Hey Patrick

Here's the contrary view.

Ordinarily, I recommend exhausting your conventional financing options first, but it seems conventional is exhausting those avenues for us.  Right now, conventional financing is a pain.  There's a lot of extra hassle right now, particularly with Fannie/Freddie putting a 7% cap on the percentage of a lender's portfolio that can come from second homes and investor properties.  That's one of the reasons for the sharp increase in LLPA's (loan level price adjustments) as well as the jack in investor rates.

DSCR (debt service coverage ratio) lending, on the other hand, is experiencing exponential growth. Loan to values are higher (80% ltv for 1-4 units on purchase, 75% for cash out refinances) and rates are generally ending up in the mid 4's on 30 year fixed loans. These loans require no income verification, no pay stubs and no tax returns and are based on the guarantor's credit and the asset's market rent. You can do it in an LLC or your personal name.

Plenty of brokers here on BP to guide you.

Stephanie

 

@Patrick Davenport Sounds like the issue you're running into is due to buying in your LLC's name, that makes it a commercial loan. Buy it in your personal name you should be able to get 30 year fixed rate at sub 4% interest rates at this time. Depending on your DTI and credit scores, etc.

What is the goal of buying them in your LLC's name?

@Patrick Davenport I’m still small potatoes but I’m getting the loans in my name for 30 year fixed rate, my current one is at 3.675%.

I’ve got an umbrella policy that still covers all my liability for my net worth. If you took into consideration my leveraged worth I might need to go higher on the umbrella but I figure there’s no value in outstanding debt.

@Stephanie P. - I think your explanation here might also explain what I'm experiencing. Closed on a house in April, zero points. Buying another now, same bank, same great scores, same rate - and suddenly, three points. Bank says it's just because it's an investment property, and LLPA has just gone up for investment properties.

Would you agree?

Originally posted by @Steve S. :

@Stephanie P. - I think your explanation here might also explain what I'm experiencing. Closed on a house in April, zero points. Buying another now, same bank, same great scores, same rate - and suddenly, three points. Bank says it's just because it's an investment property, and LLPA has just gone up for investment properties.

Would you agree?

Yes, absolutely. We're crazy busy right now and I have Fannie Mae to thank for it. I priced a loan last week against a Fannie Mae quote. Fannie Mae was at 4.875% on a 30 year fixed with 1.75 points. We were at 4.75 with 2. Ours was no income verification and could close in an LLC. The Fannie loan was the normal Fannie turmoil when it comes to an investor that has rental properties and is self employed. The borrower actually bought it down to 4.25% with 4 points.