Purchasing first rental property under LLC with mortgage

10 Replies

Hello everyone,

I've been an off/on lurker here for a couple years and an aspiring rental property investor. 

After finishing grad school a few years ago and building some capital, I'm finally in a position to potentially invest in a rental property.

Ideally, I would like to obtain a mortgage to purchase property under an LLC from the get go. But, correct me if I'm wrong, I understand that obtaining a mortgage for a newly formed LLC would be extremely difficult. So, I'm assuming this may not be an option.

I do currently have enough cash to purchase a property outright, placing the title under the LLC. But since this would be 90% of my savings, I do not want keep the cash equity in the house. My question is, would I still run into problems obtaining a mortgage under an LLC for a paid off property owned by the LLC?

Thank you ahead of time for all advice/suggestions. This is a great site!

Anthony 

You can purchase the home using normal conventional financing and then about 3 months after you close on it you can quit claim the home into your LLC. I am assuming you want to do this for " protection " correct? Understand that just putting it into yuor LLC is not a bulletproof plan to make sure you dont get sued or risk any personal assets. Your best protection is to get an additional umbrella insurance policy on top of the one you will already have.

Good luck

Medium buymemphisnow stacksCurt Davis, Buy Memphis Now | [email protected] | 605‑310‑7929 | http://www.BuyMemphisNow.com | TN Agent # 00321765

Ah, also, I personally don't want to place a mortgage under my name and transfer the deed into an LLC because I have yet to purchase my own live-in home (I'm paying significantly cheaper rent than what my monthly PITI would be for a similar home). So having a rental property's mortgage under my name would significantly increase my debt-to-income ratio, which will play a major factor when applying for my own personal home loan.

@Curt Davis are there provisions that may prevent him from doing the quit claim? (asking for myself too btw).

I recall being faced with the same choice and we opted not to becsuse the rate would have been higher and we felt our insurance was enough. 

The LLC will get financing based off of your credit any how since it's brand new. LLCs are like anything else, they have merit after tax returns so until you have them any credit cards or lines of credit will be based on your income. The sooner you start the better so you can file taxes - and organizing expenses on a corporate card makes it easy come tax time.

So the one difference you may find is that the financing will cost more because it will not be a loan to you. Meaning you wouldn't be able to get FHA or VA financing for example. We have great accountants who help us tremendously - you may consider running this by yours.

I hope that helps.

Medium erm logoMichael Roy MBA, EastRoy Management, LLC

Originally posted by @Anthony Portugal :

So having a rental property's mortgage under my name would significantly increase my debt-to-income ratio, which will play a major factor when applying for my own personal home loan. 

Respectfully, the thought behind the separation of debt is inaccurate. I own my own company (non REI) so again this is just my experience. When you get your EIN and take it to a bank and open business accounts, you will no doubt look to open a credit card. Any credit is ran against you. Your social security number. So it is indeed your debt.

Whenever I apply for any kind of financing, my company debt is factored in. Unless someone else is going to own the company, it all comes back to you.

I hope that helps.

Medium erm logoMichael Roy MBA, EastRoy Management, LLC

Even if you get a mortgage through on the LLC's name, mortgages still require a personal guarantee, which means--you. There's no way around that one. I completely agree with @Curt Davis about the LLC not making anything bulletproof and making sure to have an umbrella policy. 

I wrote an article a while back explaining why I didn't go the LLC route on my properties. And read through the comments too...those are arguably more helpful than the article!

http://www.biggerpockets.com/renewsblog/2013/08/17...

Medium hipsterinvestment logo black300dpiAli Boone, Hipster Investments | [email protected] | 310‑957‑2101 | https://goo.gl/x52ZKJ | CA Agent # 01911993

Ok, so if I'm understanding correctly, any debts acquired under the LLC, will actually be debts under my personal name as well. These debts/loans under the LLC will be viewed/considered when I'm applying for personal credit/loans outside of the LLC, thus increasing my personal debt-to-income ratio. A higher personal debt-to-income ratio will potentially reduce the amount for future loans/mortgages I may be approved for, despite those debts being under an OLD. Am I correct in these assumptions?

See, that is my main concern about pulling the trigger on investing in rental property. I am also in the market to buy myself a house within the next year, but don't want what I do with property investment to interfere with my ability to purchase my personal home (in regard to loan amount approval). 

So, the advice in my situation would be to hold off on buying investment properties until I secure my own personal home purchase/mortgage?? That way I don't have to worry about a higher debt-to-income ratio that would potentially deny me a mortgage in the amount I may need for my personal home property??

Regardless of when you buy an investment or a home the total debt counts so your debt to income is pretty much the same regardless of the order you buy things. I would forget the LLC for the moment (doesn't sound like you have lots of assets to protect). In your situation I would buy a house for myself to turn into a rental in a few years, then turn it into a rental and buy another house for myself. The mortgage is owner occupied and cheaper. Just make sure to change the insurance when you move out.

Originally posted by @Anthony Portugal :

Ok, so if I'm understanding correctly, any debts acquired under the LLC, will actually be debts under my personal name as well. These debts/loans under the LLC will be viewed/considered when I'm applying for personal credit/loans outside of the LLC, thus increasing my personal debt-to-income ratio. A higher personal debt-to-income ratio will potentially reduce the amount for future loans/mortgages I may be approved for, despite those debts being under an OLD. Am I correct in these assumptions?

These assumptions are correct.

So, the advice in my situation would be to hold off on buying investment properties until I secure my own personal home purchase/mortgage?? That way I don't have to worry about a higher debt-to-income ratio that would potentially deny me a mortgage in the amount I may need for my personal home property??

This really depends on what your goals are.  Meaning both properties (Primary residence and investment) are investment vehicles to get you somewhere long term.  You will always need a place to live.  How you structure your debt today will impact your flexibility tomorrow. 

There are a couple of different ways you could approach this -- one is buy your primary res and ensure your income covers that and then seek out investments.  Or buy an investment property and rely on the cash flow from that property to support your primary residence.  Each approach carries with it a different level of risk - and with any other investment your risk tolerance is what is the biggest factor.  You want to avoid over leveraging yourself.

Another way to look at this is - if you could bring someone else in on your  purchases (Spouse or family member) then which one would it make sense for them to come in on?  Sure you may have to split the revenues at the end of the year with them, but 50% of a deal is better than 100% of nothing.  

So come up with where you want to be in 3 and 5 years - then work backwards on how you want to get there in some sort of a plan.

I hope that helps.

Medium erm logoMichael Roy MBA, EastRoy Management, LLC

Thank you everyone for the great advice so far.

At this point, my goal with property investment is to supplement my primary income, not necessarily to completely replace it as my main source of income. I currently have a great long term career that compensates me very well, which I'm very happy with. But, I do have a very strong entrepreneurial itch and an interest in real estate. 

That being said, I can say it is more important to my fiance and I to have the ability to gain our "perfect" home than it is to obtain investment properties, which may interfere with getting our "perfect" home. I understand that the income gained from investment properties adds to our yearly income and may help balance out that increased debt-income ratio, but loaners want to see 2-3 years of tax returns for mortgage approval. Meaning, if I were to obtain investment properties first, I'd have to wait for that long until loan companies/banks recognize that income toward loan approval. Does that sound correct?

With regard to the advice on securing a traditional mortgage note and then using a Quit Claim Deed to transfer ownership, this is not a valid process to legally move ownership with a financial institution. 

Most mortgages have a "Due On Sale" or similar clause that allows the lender to call the entire mortgage upon transfer of the property (Even if it is an "arms-length" transaction and you are transferring it from yourself to a Single Member LLC of which you are the only member). So if the lender finds out you transferred the property, they may try to get you to pay the entire remaining balance of the mortgage.

Then, you will have to refinance the property under the LLC and you'll end up paying double on your Title costs and potentially another appraisal.

Also keep in mind that your loan structures under an LLC will be much different than your traditional long-term fixed mortgage. Typically, you will see something more akin to an ARM with a "note" or "lock" period and along with an amortization term (usually a max of 25 years).

As it pertains to the additional liability affecting your Debt-to-Income calculation on buying a first primary mortgage, as long as the investment property cashflows positively, it shouldn't matter. Of course the debt will be used in your global cash flow calculation, but if your income property is preforming year over year, it should be net positive anyhow which will offset the DTI issue. However, this is another reason to have the income property under an LLC...you don't want that note reporting on your personal credit because it can then affect other areas of your life (credit cards, cell phones, etc).

If you have a lender that is not helping you to perform a Net Operating Income calculation on your investment property, or they are not doing it themselves, RUN.  Any lender worth their salt should be helping to advise you on the property you want to purchase to make sure it is and will produce positive cashflow for the financial stability of you (which in turn assures the note can and will be paid back). 

I hope this helps,

Matt

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