What are the LOOPHOLES about an All-Cash vs. Conventional loan?

3 Replies

We are closing on a deal on a passive income property and wanted to know what are all the loopholes?

- Property is in Memphis.

- Property is worth 100k.

- Plan on purchasing 15 properties.

- 7% ROI

What are the ad/disadvantages of the closing?

What are the ad/disadvantages of refinancing?

What are the ad/disadvantages moving it to an LLC?

What are the ad/disadvantages of moving it to a commercial loan?

If you plan on purchasing 15 properties, watch your loan count.  If you stick with 1-4 unit properties, try to get conventional financing to take advantage of the best rates and terms.  Your first 4 properties will go smoothly like butter.  Properties 5-10 will be incrementally harder, but still can be done.  Once you get to 10, the conventional train stops, and you have to switch over to Commercial.

So, IF there is a way for you to pay off loans to stay under the 10 count, DO IT.  Stay in the conventional loan realm.  

Obviously, if you go over 4 unit properties, you HAVE to obtain a commercial loan.  In that case, just shop lenders.  There can be a spread between them for rates and terms.  Also, local banks may be better.  Not always, but in may cases.

What are the ad/disadvantages of the closing?


What are the ad/disadvantages of refinancing?

Cost is the primary disadvantage, along with the hassle of dealing with a lender.  Advantage is getting better terms.

What are the ad/disadvantages moving it to an LLC?

There might (or might not) be better asset protection with properties in an LLC. Which really means you're isolating different assets so a lawsuit against one doesn't affect others. But you REALLY want to discuss this with a knowledgeable attorney who can evaluate your entire situation. Downside is no conventional loans. Commercial only for LLCs.

What are the ad/disadvantages of moving it to a commercial loan?

Disadvantage is the rate will be slightly higher and the terms will be worse. No 30 year fixed rate commercial loans. Those are a quirk of "conventional loans" that's to government policies that create them. Commercial loans will have shorter amortization periods combined with balloon or ARM terms. A fully amortized, fully fixed rate commercial loan will likely have a maximum term of 15 years. But terms on these loans vary widely. Shop around. Big advantage is they're not limited to 10 like conventional.

For the property transfer, what you want to do is acquire the property in your personal name and then transfer to a land trust that is owned by the LLC. This gives you protection and anonymity without getting in any trouble with the due on sale clause

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