I have some cash that I'd like to invest on a commercial property. Eg. I saw a $230k office condo that is leased at 10% cap. Would like to get advice from the experts regarding financing and how to reduce my liability if anything goes south (god forbid). Is it possible to say open an LLC, then pay 20% down and bank loan 80% to the llc. When a credit check is done, will the 80% loan show against my me and am I personally liable for the loan or the LLC?
You will have to be guarantor for the LLC. Your bank won't loan solely to an LLC you spun up for $500, a week before applying. And at that price point, it will be a recourse loan so there will be liability involved.
Thanks for your reply Michael. Is there any other way I can reduce my liability, like some insurance, etc?
So you want to offload the risk of things going south? Credit default swap? Sorry not happening.
I like retail condo better than office condo. I like medical office condo as build out is extensive and hard for tenant to move. Regular office they can pull up a truck late at night and be gone the next morning.
Additionally if economy gets tough regular office tends to move to warehouse space for cheaper rent or keep office fully in their house etc.
With medical tenant and also many retail type businesses their model requires a storefront and visibility. With the build outs it is harder to move.
With any tenants things can happen and they can move. I am just not that big on regular office. Some of them tend to work like slobs in them as the do not have customers frequent the spaces often if at all.
With condo's you are dealing with associations and that can be a pain and have it's own risks. One of the benefits is buying a small space say for 200k with a tenant where owning the building might be currently out of reach as it costs million of dollars in price.
Some buy one condo unit and then work to buy more as the years go by and their net worth and liquidity increases so they can then control a majority of the units.
@Brad Jones I can only speak to what I have done in the past but we do lend to LLC's (even new ones-actually most LLC's are property specific that I see in this space such as 1234 main st LLC, etc.) we do require you to be the personal guarantor however @Michael Le would be happy to know we are a non recourse lender, we do not report to credit at all. :)
@Ash Patel as you can see we are still out there! Limited to no risk for the investor but that comes with a requirement that the subject have an effective Debt Coverage ratio and that the personal guarantor has good credit (even though we are non recourse we are not crazy!!)
@Michael Huck , non-recourse on a $175k loan? Very surprised but cool. Also, regarding recourse loans I'm not worried about my credit... I'm worried about someone going after my balance sheet... lol. Although granted not as much a worry as if with a multimillion dollar loan.
@Michael Le we go up to 5MM all non-recourse :) at that level we have rental assignments added to title so in the case of default all rents are transferred to us for debt coverage but that is all we do if they are late or not performing up to the point of foreclosure. We actually work with the client to see if they can find new financing and do all we can to save the property for them but of course not every property can be saved.
@Michael Huck - Thanks for tagging me. I'm very curious, what are the drawbacks of going with a loan like the one you mentioned, compared to a conventional loan. Another way to phrase this question, why shouldn't everyone go with your type of loan vs conventional? Assuming credit is good and debt coverage is adequate.
What types of kickers would cause this to become a recourse loan? Thank you!
@Ash Patel No problem! I would say that the drawback is going to be higher interest rate (I start in the mid 7s for great credit and a Multi family or SFR and high 7s low 8s on Office, Warehouse, retail) because a place like Chase or another large bank could have a rate in the 4-5% range for a similar deal.
Loan to Value is another drawback, I am going to be looking for a min of 25-30% skin in the game on a purchase and 30-35% on a refi.
I would say those are the main reasons why it is not for everyone!
@Michael Huck - Thank you for that!!!
Wells Fargo has a small loan program called BREF that solely lends on commercial building loans under $500k. All loans require a personal guarantee and lenders will typically require the manager of the LLC and any 20%+ owner of the LLC provide personal information for the financing. Just a FYI, if you hold title in a LLC, most often the loan will not show up on your personal credit report (depends on lender but in most cases on a commercial building financed by a bank, it will not be shown).
I preach this a lot but this is why I stick with a local lender who just gets deals done for me. The few times that I have strayed, it was such a pain. I may pay a higher rate on the fully leased NNN's but they will also finance empty broken buildings for me.
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