Starting new LLC to borrow money for commercial property

Vancouver, British Columbia · Member since 2008 · 27 posts · 0 votes

Hi, I'm Canadian.
I'm planning to start a new LLC in a state (possibly Nevada), so that i can use it as the entity to apply for a mortgage on a small apartment building (8-18 unit).

Can a brand new LLC with no credit or previous transactions qualify for a mortgage?

I was told that on a 1-4 unit residential, the lender considers your financial statement. On a 5+ unit commercial, the lender considers the businesses financial statement. Therefore, i think its possible.

Any experience with this?
Thanks.

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Manhattan, NY · Member since 2008 · 801 posts · 61 votes

17y

As with most myths/legends there is a grain of truth in them.

Originally posted by Julian Ferreira:

Hi, I'm Canadian.
I'm planning to start a new LLC in a state (possibly Nevada), so that i can use it as the entity to apply for a mortgage on a small apartment building (8-18 unit).

Unless the apartment building is in Nevada, don't waste your time and money.

Yes, it does happen all the time, every business day.

But, and there is a really big one here, if this is your first commercial deal, it won't happen for you easily.

This is where everyone gets really confused.

Here are the facts. With a commercial business loan the lender is not looking to your income as a source to satisfy the loan. They absolutely will look at your credit to determine the likelihood you are able to run the business they are funding. Specifically, they will be looking to see examples of poor money management and examples where you did not pay obligations as agreed. So, if you have crappy credit, a commercial loan is not in your future. It doesn't matter if that business is new or old. And no, not even the "seasoned shelf corp" scam will overcome that, lenders will look at the financials of the owners unless and until you are publicly traded with a long history of audited financial reports.

This is a great big, "it depends" area.

Any experience with this?

Thanks.

Yes, over 24 years worth.

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Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y

No, of course not! No lender is going to loan a brand new LLC money without requiring a personal guarantee from the owner of the LLC (you). Commercial lenders do consider the quality of the deal, but they also consider the credit of the borrower.

Mike

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Account Closed
Manhattan, NY · Member since 2008 · 801 posts · 61 votes
17y
As with most myths/legends there is a grain of truth in them.

Originally posted by Julian Ferreira:
Hi, I'm Canadian.
I'm planning to start a new LLC in a state (possibly Nevada), so that i can use it as the entity to apply for a mortgage on a small apartment building (8-18 unit).
Unless the apartment building is in Nevada, don't waste your time and money.

Yes, it does happen all the time, every business day.
But, and there is a really big one here, if this is your first commercial deal, it won't happen for you easily.

This is where everyone gets really confused.
Here are the facts. With a commercial business loan the lender is not looking to your income as a source to satisfy the loan. They absolutely will look at your credit to determine the likelihood you are able to run the business they are funding. Specifically, they will be looking to see examples of poor money management and examples where you did not pay obligations as agreed. So, if you have crappy credit, a commercial loan is not in your future. It doesn't matter if that business is new or old. And no, not even the "seasoned shelf corp" scam will overcome that, lenders will look at the financials of the owners unless and until you are publicly traded with a long history of audited financial reports.
This is a great big, "it depends" area.

Any experience with this?
Thanks.
Yes, over 24 years worth.
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Julian F.
OP
Vancouver, British Columbia · Member since 2008 · 27 posts · 0 votes
17y
Ok so i can start the LLC and use it to apply for the loan, but I need to put the responsibility to pay the loan on myself, correct?

So lets say my income was $0 and my credit is great, over 700. When buying commercially, and the property has good cash flow, I could still get this loan?
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Julian F.
OP
Vancouver, British Columbia · Member since 2008 · 27 posts · 0 votes
17y
Major reason im inquiring about the LLC is because its hard for me to get a loan with a US lender.
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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
Not sure 700 really qualifies at "great" these days. The lack of income will be a problem. Have you tried speaking with any lenders? Do you have money for a down payment and reserves?
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Curt DavisBusiness Member
Flipper/Rehabber · Memphis, TN · Member since 2008 · 5k+ posts · 2k+ votes
17y
Julian, for you to just jump into the commercial game is not as easy as you think. You are from Canada which means you will not get financing in the US. This is a major hurdle.Just starting a new LLC does not mean anything. Anyone can do this. It also sounds like you have little investing experience. I could be wrong but I have tried to help many Canadian clients try to get financing in the US and I have not found anyone yet. There are many steps you will need to take to position yourself to not only invest in the US but to invest in general.
Curt Davis - KAIZEN Realty538 Reviews
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Account Closed
Manhattan, NY · Member since 2008 · 801 posts · 61 votes
17y
Originally posted by Julian Ferreira:
Ok so i can start the LLC and use it to apply for the loan, but I need to put the responsibility to pay the loan on myself, correct?

So lets say my income was $0 and my credit is great, over 700. When buying commercially, and the property has good cash flow, I could still get this loan?
The income of the property will be the income considered for the loan. I'm not sure 700 is all that "good" any more.
The lender will also look at your experience. Have you owned or managed other commercial properties? How did they perform during your holding tenure? Also, where are your organizing funds coming from as you form this new LLC? What about the down payment? The expected reserves of the LLC and of the property? Who are the other principals in this with you? What is their experience?

It isn't just a matter of the property having good cash flow. It is also a matter of whether you increase or decrease the lender's risk when they invest in you and your new business by writing the loan.
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Account Closed
CA · Member since 2008 · 277 posts · 11 votes
17y

Yes, it is, according to current residential and commercial underwriting guidelines.
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Josh Green
Financial Advisor · Tampa Area, FL · Member since 2008 · 956 posts · 214 votes
17y
740 is the new 700. Atleast at the bank I work at (and other banks in my area as well).
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Michael Rossi
Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
17y

I agree with Jon and Taz above. However, I would like to be a little more concise. The answer to your question is NO! If you have no income (assuming that you aren't independently rich), the bank is not going to give you a commercial loan. That will be a BIG red flag to the bank.

Mike

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Account Closed
Manhattan, NY · Member since 2008 · 801 posts · 61 votes
17y
I am posting this only in the interest of completeness.

Julian, it is not the lack of income that will prevent you from getting funding, it is the lack of EVERYTHING else that matters.

You have no track record with commercial property. So, unless you have experienced partners this is a big strike against the lender writing the loan.

You are forming a brand new LLC to hold the property and be responsible for the loan. The lender will want a personal guarantee but since you are NOT a US citizen their risk goes up and your chances of getting the loan go down.

You may or may not be able to prove to the lender the property cash flows well and in all aspects is a great deal. But, you have never done that before so they will be looking for anything, absolutely anything, to refute that contention.

Your personal income would matter only from the standpoint of how you manage your finances. If, for example, your taxable income was zero because of the way you bought and managed your investments it might be okay. If your income is zero because you can't keep a job and have decided you are just going to go out on your own, well, that would never be okay.

However, no commercial lender reasonably expects your personal income to be a source to repay the loan. That is why they have things like quality of collateral and revenue milestone clauses in their notes so they can call the note or replace you as the manager long before the borrower is seriously upside down in the deal due to declining values or company revenues.

So, in short, unless there are some details you haven't shared the consensus is you are not likely to get the loan you are talking about. But, it is not (solely) because of $0 income.
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Julian F.
OP
Vancouver, British Columbia · Member since 2008 · 27 posts · 0 votes
17y
Thanks for your replies.

Your right, Im not very experienced in this area at all. I have made a single purchase in Canada. None in the US. I do have some down payment, not enough of my own to cover a larger deal ($200,000+).

My income is not $0. Last time i checked, my credit score was between 740-760. I do not have any managing experience of this kind of commercial property (I did not know lenders are able to consider this).

I appreciate the input here, it gives me a better idea of future issues to solve. Basically i am looking to get financing for a smaller commercial, or larger residential property.
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Christian Stratton
Member since 2009 · 2 posts · 0 votes
17y
I had the same question. Except I am in a little better position (I think). I too am Canadian but I have lived in the US for 10 years. I have established credit of about 765. I have a one year old Series LLC that has just got a Credit Card 2 months ago. I have bought and flipped a couple houses already but am wondering how hard it is to buy in a Sub LLC name for a 4 unit Multi Family. I have two under contract that I want to fix then re-fi in Sub LLC name (no credit established). I know I need a Personal guarantee on the loan but do I need a business plan as well? What if while I have it under private money I get it fully rented with min 1 year contracts. Will the Cap rate be enough. I have built up enough for 20% down on ARV. What % do I need for an investor loan? Where is the best place to look for loan Local Banks?
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Heather Pelletier
MA · Member since 2008 · 199 posts · 1 vote
17y
I'm bumping because I am curious what the answer to your question is.
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