When to set up an LLC and seek financing w/partner?

When to set up an LLC and seek financing w/partner?

Rental Property Investor · Austin, TX · Member since 2018 · 98 posts · 39 votes

Hi BP,

My colleague and I have started taking the next steps to forming a partnership and purchasing our 1st MFH by the end of Q1 of 2021. At the moment, I’m looking for deals, underwriting, talking to brokers and sellers, building the Team. My future partner has more of a passive role and resides abroad . We’re both coming with equal amounts of capital for our first deal. We are looking for stabilized, 6-12 -unit value-add C-class properties in C-B- areas in the ATX and SATX markets.

I have a couple of questions about the timeline for setting up a legal entity (LLC or series LLC) and seeking financing. What's your experience?

- is it easier to get financing as an existing entity (LLC or series LLC) than as two (or more) individuals? >>> does it behoove us to form an LLC before we seek financing? Or is it a requirement?

- does our place of residence have any significance when it comes to getting approved for financing? My partner (US Citizen) currently resides abroad.

- have you experienced problems with series LLCs? An attorney we spoke to recommended the series LLC for legal protection but mentioned that some lenders have a problem with it.

- is getting a loan on a 5-unit and larger easier than a 2-4-unit if the purpose is the same (investment)?

- would it make it any easier if either of us were a licensed real estate agent in the State the property is located? I’m currently a licensed agent in NYC but we’re looking to buy in TX to start with.

- can part of the down payment be borrowed money, eg. hard money, or cash advance from a credit card? How does this affect the primary lender’s criteria? Can we use hard money or other borrowed funds on a down payment with seller financing?

- what’s the best way to find reliable hard money lenders?

We’ve spoken to a RE attorney and I’m talking to a commercial mortgage broker, but would love to hear from y’all about your experiences.

Thank you and keep on working hard (and smart)!

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Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
5y
Originally posted by @Jan Kutrzeba:

Hi BP,

My colleague and I have started taking the next steps to forming a partnership and purchasing our 1st MFH by the end of Q1 of 2021. At the moment, I’m looking for deals, underwriting, talking to brokers and sellers, building the Team. My future partner has more of a passive role and resides abroad . We’re both coming with equal amounts of capital for our first deal. We are looking for stabilized, 6-12 -unit value-add C-class properties in C-B- areas in the ATX and SATX markets.

I have a couple of questions about the timeline for setting up a legal entity (LLC or series LLC) and seeking financing. What's your experience?

- is it easier to get financing as an existing entity (LLC or series LLC) than as two (or more) individuals? >>> does it behoove us to form an LLC before we seek financing? Or is it a requirement?

- does our place of residence have any significance when it comes to getting approved for financing? My partner (US Citizen) currently resides abroad.

- have you experienced problems with series LLCs? An attorney we spoke to recommended the series LLC for legal protection but mentioned that some lenders have a problem with it.

- is getting a loan on a 5-unit and larger easier than a 2-4-unit if the purpose is the same (investment)?

- would it make it any easier if either of us were a licensed real estate agent in the State the property is located? I’m currently a licensed agent in NYC but we’re looking to buy in TX to start with.

- can part of the down payment be borrowed money, eg. hard money, or cash advance from a credit card? How does this affect the primary lender’s criteria? Can we use hard money or other borrowed funds on a down payment with seller financing?

- what’s the best way to find reliable hard money lenders?

We’ve spoken to a RE attorney and I’m talking to a commercial mortgage broker, but would love to hear from y’all about your experiences.

Thank you and keep on working hard (and smart)!

You should definitely set up your main operating entity LLC now before you make offers and start the process with lenders. The property itself will need to be set up in a separate LLC in the state the property is located. Lenders typically require this. Some states do not provide the protection in series LLC like stand alone so you need to research that. Different lenders will have different requirements, terms and conditions especially regarding legal residency so if your partner lives abroad his legal address and bank accounts will be need to be in US most likely.

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  • Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    5y
    Originally posted by @Jan Kutrzeba:

    Hi BP,

    My colleague and I have started taking the next steps to forming a partnership and purchasing our 1st MFH by the end of Q1 of 2021. At the moment, I’m looking for deals, underwriting, talking to brokers and sellers, building the Team. My future partner has more of a passive role and resides abroad . We’re both coming with equal amounts of capital for our first deal. We are looking for stabilized, 6-12 -unit value-add C-class properties in C-B- areas in the ATX and SATX markets.

    I have a couple of questions about the timeline for setting up a legal entity (LLC or series LLC) and seeking financing. What's your experience?

    - is it easier to get financing as an existing entity (LLC or series LLC) than as two (or more) individuals? >>> does it behoove us to form an LLC before we seek financing? Or is it a requirement?

    - does our place of residence have any significance when it comes to getting approved for financing? My partner (US Citizen) currently resides abroad.

    - have you experienced problems with series LLCs? An attorney we spoke to recommended the series LLC for legal protection but mentioned that some lenders have a problem with it.

    - is getting a loan on a 5-unit and larger easier than a 2-4-unit if the purpose is the same (investment)?

    - would it make it any easier if either of us were a licensed real estate agent in the State the property is located? I’m currently a licensed agent in NYC but we’re looking to buy in TX to start with.

    - can part of the down payment be borrowed money, eg. hard money, or cash advance from a credit card? How does this affect the primary lender’s criteria? Can we use hard money or other borrowed funds on a down payment with seller financing?

    - what’s the best way to find reliable hard money lenders?

    We’ve spoken to a RE attorney and I’m talking to a commercial mortgage broker, but would love to hear from y’all about your experiences.

    Thank you and keep on working hard (and smart)!

    You should definitely set up your main operating entity LLC now before you make offers and start the process with lenders. The property itself will need to be set up in a separate LLC in the state the property is located. Lenders typically require this. Some states do not provide the protection in series LLC like stand alone so you need to research that. Different lenders will have different requirements, terms and conditions especially regarding legal residency so if your partner lives abroad his legal address and bank accounts will be need to be in US most likely.

  • Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    5y

    @Jan Kutrzeba

    You've got a bunch of topics.  I'm going to try to address them, but it's going to be in a haphazard format (sorry, I'm not a poet).  Direct message if you just want to chat about this:

    Lending is just different for what you are looking for. Legal entities are not eligible for conforming residential loans. So, by taking Title with the LLC you should be taking the loan with the LLC. With real estate, its common for the individuals to personally guarantee the loan. This, in my layman's opinion, is better for your corporate veil than buying personally then quit claim deeding the the Title over to your LLC. Here is just one of my posts on that:

    https://www.biggerpockets.com/...

    Usually, you don't form the LLC until you are under contract. You write the offer with the buyer as "Jan Kutrzeba and partner, or an entity to be formed." In this way, you don't have to bear any additional costs with having the LLC. Also, its common to just name the LLC the street address of the property to keep things straight.

    So, with a legal entity you'll be looking for commercial lending. Don't go talking to a residential loan officer who says you have to take Title in your personal name, then quit claim deed it over. Remember, the loan officer just wants to sell you a loan and has not fidiciary duty to protect the corporate veil of your LLC.

    As with the above entity formation, its common with hard money lenders that they will want the property in a LLC, and only that property. It protects their interests as well. But, its not always the case with HML. Remember that these loans as short term (e.g 6 or 12 months) so you will have to refinance into some other loan once you are done with the rehab. You cannot have somebody living in the property.

    Some national lenders that another BP post gave that seem to specialize in real estate lending are CoreVest Finance, Lima One Capital, Visio Lending.  I've never used them.  Supposedly they will provide commercial loans with 30yr terms...

    Series LLC are pretty new and only exist in a handful of States, so no idea..

    By definition, 1-4 family properties are considered residential.  Anything more is considered commercial.  So, an apartment building with 5 units is actually a commercial property even if there is commercial/business activity going on.  So, you will have to get commercial lending anyway since the conforming residential loans are only for, well, residential...

    No, you don't need a real estate license to invest...

    With commercial lending, its not really regulated as heavily like residential lending.  So, its whatever you can find that a company will agree to.  However, your examples are kinda "out there..."  That's kind of a different discussion.  You need to think back to lien positions, etc. and the lender's risk...

    Since you are investing with a non-spousal partner, your best/only option is to use some sort of entity.  Its pretty much necessary for tax purposes to cleanly assign the profit/losses (N.B.  the deductions you can take on a rental are irrelevant whether you use an entity or not --- entities are for asset protection / limited liability).  Also, the rest of the "what-ifs" are spelled out if you setup the Operating Agreement correctly (seek professional assistance).

    You'll want the entity taking Title to be formed in the State that the property resides.  Otherwise, your entity will have no legal standing in that State...

    Back tracking a bit on forming a LLC...  You each might want to create your own LLC's.  Then, your respective LLC's are the members of another LLC that takes Title.  This extra layer of structure is just an idea.  It gives you some flexibility in your investing and perhaps allows you to have a permanent entity to pursue branding.  Regarding the "flexibiilty" aspect, lets say you get another partner.  Then, instead of figuring out the "buy-in," they can just partake in the next deal which will have its own LLC anyway --- assuming you go that way...  In the following thread, I talk more about having a Mgt LLC which might be something you want...
    https://www.biggerpockets.com/...

    All, this being said, definitely keep it simple the first time.  Of course, have professional guidance.  But, get your feet wet, make sure you and your friend do partner well.  By experience, figure out what you really need and want.  That's they key.  There is no one "right" way to do this investing.

    Good luck.
  • Rental Property Investor · Austin, TX · Member since 2018 · 98 posts · 39 votes
    5y

    @Greg Dickerson Thank you! Waiting to hear back from our mortgage broker regarding my partner's residency, and other topics.

  • Rental Property Investor · Austin, TX · Member since 2018 · 98 posts · 39 votes
    5y

    @David M. Thank you so much for a very thorough response! I haven't found a good book geared towards investors that'd break down the most commonly used legal strategies when starting out, step by step. Maybe you have some recommendations? Like you wrote, there is no "right" solution to these. 

    Thank you for including links to your BP posts - I'm looking fw to reading them.

    Is $400/h a reasonable rate for an experienced CRE atty? $400-$600/h has been the range here in Austin btw the three attorneys I've reached out to.

    Very interesting idea about each one of us forming our own separate LLCs. I'll need to bring that up next time we speak to an attorney. We'll definitely be looking for capital in the near future in order to scale, whether from future partners or passive investors. Thanks again for the link to yet another post!

  • Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    5y

    @Jan Kutrzeba

    I don't know the market for commercial real estate attorneys...

    No, I don't know a good book either.  I'd be happy to chat.  Remember, its a tough interplay between how much do WANT and/or NEED to separate your various liabilities.  And don't forget there are taxes involved.  If you can find a JD/CPA that is a very powerful combination.  While they usually know their lanes, I've found that one profession's advice is counter to the others, e.g what may be best for legal protection may not be best for accounting/tax purposes.

    Also, the more complicated your setup, generally the more complicated will be your operation.  Each entity should have its own bank account and set of books.

    Don't forget that entities are formed by State and follow State laws and regulations.  So, I'm guessing it can get pretty interesting once you start investing "everywhere."  Don't forget that "complex" structuring is still used by many other commercial disciplines as "everybody" needs to segregate their liabilities.  So, at what point do you need to get to the "big boys,,,"

    Come to think of it $500/hr attorneys are either really going to be worth it, or you are paying for some big shots while it sounds like you are still trying to crawl.

  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    5y

    Originally posted by @Jan Kutrzeba:


    My colleague and I have started taking the next steps to forming a partnership and purchasing our 1st MFH by the end of Q1 of 2021. At the moment, I’m looking for deals, underwriting, talking to brokers and sellers, building the Team. My future partner has more of a passive role and resides abroad . We’re both coming with equal amounts of capital for our first deal. We are looking for stabilized, 6-12 -unit value-add C-class properties in C-B- areas in the ATX and SATX markets.

    I have a couple of questions about the timeline for setting up a legal entity (LLC or series LLC) and seeking financing. What's your experience?

    I set up hundreds(thousands) of entities for investors, lots of Series LLCs across multiple states. They are very cost effective for specific situations, but no big players use them. Its not worth a .01% risk.

    - is it easier to get financing as an existing entity (LLC or series LLC) than as two (or more) individuals? >>> does it behoove us to form an LLC before we seek financing? Or is it a requirement?

    I don't think its easier, additional guarantors makes it stronger. Form LLC first and have bank account open.

    - does our place of residence have any significance when it comes to getting approved for financing? My partner (US Citizen) currently resides abroad.

    Yes, it can be a negative factor due to lack of US assets or a borrower's willingness to default and never return to the US. I'd avoid that topic and mention a return intent.

    - have you experienced problems with series LLCs? An attorney we spoke to recommended the series LLC for legal protection but mentioned that some lenders have a problem with it.

    Lenders may require and SPE (single purpose entity) just ask and you'll know, TX lenders are familiar with series LLC, but not all banks like it.

    - is getting a loan on a 5-unit and larger easier than a 2-4-unit if the purpose is the same (investment)?

    It depends on property, in general, 5 unit is commercial and a different process than an individual investment in 1-4 unit. but if you're borrowing in an LLC, probably identical process.

    - would it make it any easier if either of us were a licensed real estate agent in the State the property is located? I’m currently a licensed agent in NYC but we’re looking to buy in TX to start with.

    No, I don't think so.

    - can part of the down payment be borrowed money, eg. hard money, or cash advance from a credit card? How does this affect the primary lender’s criteria? Can we use hard money or other borrowed funds on a down payment with seller financing?

    Usually cannot be borrower, thats additional debt for DTI, I thought you were contributing capital?

    - what’s the best way to find reliable hard money lenders?

    Ask here, talk to borrowers who recommend theirs.

    We’ve spoken to a RE attorney and I’m talking to a commercial mortgage broker, but would love to hear from y’all about your experiences.

    RE attorney is key especially on a first deal, pay once, then decide whether its worth it on your future deals, but keep talking to attorneys, a small deal like this may be better as a flat rate vs $600/hour.

    Thank you and keep on working hard (and smart)!

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