FHA + Short Term Rental + LLC possible?

Question

Hi there,  I am looking for my first House Hacking investment and planning to use an FHA loan, I am currently located in Chicago, IL.

Question 1: Can I apply for FHA under my name, live in one unit and then, rent the other units as a long-term to my LLC that will legally sublease as STR (AirBnB) ?

I know that I cannot get and FHA with an LLC.

The idea of the LLC is 1) Tax benefits 2) Protect myself  from liabilities. Question 2: Can I combine FHA + IHDA program? I am trying to minimize the down payment as much as possible.

Thanks for your help!

Luis

Crystal Smith · Answer

20+ years ago I purchased a multifamily with a loan under my name. Established an LLC as the property management company for the property. Payments from tenants went to the LLC. There weren't any substantial tax benefits at the beginning. The only real protection from a liability standpoint is tenants thought they were dealing with a management company. If they checked public records though they would have found my name as the owner so not really any protection.  Get the proper insurance if you want to protection.

Regarding combining FHA & IHDA- I believe the answer is yes.

Matt Devincenzo · Answer

I think you misunderstand the idea of 'tax advantages'...

1)the protection of assets...in theory an LLC does this, but that has nothing to do with taxes. As a single member entity it is questionable what protection you may actually have anyway since any decision you personally make could still be an opportunity for you personally to be liable.

2) pass-through taxation...this means that the tax treatment is the same for your LLC as you personally. All the income/expenses are passed through.

3) deducting business expenses...you can always deduct business expenses. An expense meeting the qualification for being legitimate allows it to be deducted regardless of the LLC or individual entity involved.

Drew Sygit · Answer

Renting LTR to an LLC you 100% own, and then having that LLC rent as STR, would probably be seen as a fraudulent attempt to circumvent the FHA requirements.

Zack Karp · Answer

@Luis Capriles

Yes you can rent the units to a LLC with a 1 year lease.

Yes you can use FHA + IHDA.  However, the max DTI for IDHA is only 45%, which could significantly reduce your buying power.  A better solution is doing it without IHDA, and getting a seller credit large enough, so that all you would need to show is the 3.5% down payment.  As long as you have the 3.5% down payment in verified funds (which can also be a gift), then it's all about how you structure the offer to make the numbers work.  The right loan officer and realtor can help you with this part.

Best of luck!

Paul De Luca · Answer

The language is pretty black & white. If the borrower is using FHA financing, the units cannot be used as I described above, period. Right you're saying the LLC would renting the units on a longer term basis from you but if you turn around and try to have the LLC rent the other units for less than 30 days you're still violating the rules. If you violate the terms of the loan you're committing mortgage fraud. @Zack Karp care to chime in?

Luis Capriles · Answer

Thanks @Paul De Luca,  do FHA loan rules apply in the case I do long term rental to a LLC and this LLC sublease the units as STR ?

Technically I (as a FHA borrower) would be renting more than 30 days to the LLC thus not braking any FHA rules, right ?

Thanks

Paul De Luca · Answer

@Luis CaprilesFHA loan rules do not permit rentals of living units in the home purchased with an FHA mortgage if those rentals are for less than 30 days. The Airbnb business model is not acceptable under FHA loan rules, which means that if you purchase with an FHA mortgage, Airbnb operations are a violation of the FHA loan rules.

Luis Capriles · Answer

Thanks @Wayne Brooks, Could you please elaborate?  My understanding of RE LLC tax advantages are 1)the protection of assets, 2) pass-through taxation,  3) deducting business expenses.

Wayne Brooks · Answer

1....yes, but there are no tax advantages to an llc.

FHA + Short Term Rental + LLC possible?

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