Getting loans under an LLC

39 Replies

I currently own a Duplex zoned for students, it's in my name. I'd like to build a portfolio but I plan on forming an LLC. Thoughts on that?

Second I've hear people say it's hard to get financing for a mortgage through an LLC. How true is that?

Third how would you do a flip through an LLC?

I know those are kind of broad questions but I need some opinions on how to start. Thank you!!!!!!!!!

1) Form the LLC, it takes 5 minutes. You can transfer title to the LLC. It doesn't have to happen overnight, so maybe get another property first and get momentum if you want to save $$. However, I would always have an investment under an LLC + insurance.

2) It doesn't really matter. They will just have you personally guarantee everything even if it is under an LLC, which you probably were doing anyways.

3) Same as you would any other flip. Buy via LLC, take loan via LLC (personally guarantee as well), renovate w/expenses all under LLC (keep receipts of course), and then sell under your LLC.

They are broad questions, but hopefully that helps a bit!  

@Ujwal Velagapudi

Have you gotten a loan through an llc before? Was it a conventional loan or something else? I just refinanced and was talking about what would happen if I had my house under an llc with my lender and he said they wouldn't give a loan for an llc owned house.

Yes, I have for commercial, but never for anything residential. Was it your primary residence? Maybe they wouldn't have directly to the LLC, which is common. I would ask if they can put it under the LLC, but still have it personally guaranteed by you, which satisfies both of your needs.

@Jake Arnold

Legal entities such as LLC's are not eligible for conforming residential loans. That's why so many people shy away from doing it more properly. Thus, you must use commercial lending.

In my layman's opinion, you shouldn't buy a property personally and deed to your LLC. I've posted on this constantly and nobody has rebutted. Causes too much potential damage to your corporate veil.

If you want the liability limitations of the LLC, the LLC has to own/operate everything in total. There will be a cost to this, but that's the cost of the extra protection you are trying to build up.

I hope this helps. Good luck.

It depends on the lender you are looking at. Private money won't make a difference in terms of your liability. Some private lenders allow personal names and some want an LLC. Calling around in your local market is probably your best bet.

@Jake Arnold call as many lenders as possible in your local area and ask them. Look for local portfolio lenders, credit unions and small banks and just have a conversation.  

On a side note, if you quitclaimed to an LLC I would make sure you have the correct insurance and what the impacts are if you have to change your insurance.

@Jake Arnold a new LLC has no credit history, which is why people are saying you need to personally guarantee loans in an LLC. Personal guarantee can happen two ways.

1. If you are going after conforming residential loans, they will not lend to an LLC. That means the loan and title need to be taken in your personal name. Some of these loans will then let you transfer title to an LLC, but the loan remains in your name. This can be problematic when trying to claim separation of the LLC from personal. The advantage of conforming residential loans is you get lower interest rate and up to 30 year fixed term, but it is limited to 4 units or less.

2. The second way is having the LLC take out the loan, but adding a personal guarantee. This type of loan is a business loan or commercial loan. It means you pay higher interest and often the term is only fixed for 5 years. If the LLC runs into liability issues, it could be sued and assets could be taken. You could still loose money because your personal backing of the loan is not protected under the LLC. The advantage of taking out the loan through the LLC is it could build credit for the LLC, which means future loans may not require a personal guarantee. Other ways to do this are taking out a credit card through an LLC.

The best option partially depends on your current financial situation. If you are early in your investing career and have relatively low net worth, doing business in your personal name is low risk. I say that because you don't have much to lose. Whatever you do, make sure a good liability insurance policy is part of your strategy. This is more important than LLC.

@Jake Arnold your LLC has to have age like two years and older you can open a bank account with credit federal union for 90 days with funds over 5,000 you can open also open credit card is a start some people do this with 3 to 4 banks and keep money.

@Jake Arnold I know people get Llc let them age because they open doors when ever you want to start a business and get loans . Use the funds to fix and flip

I've got an LLC that's about a year old now and a strong personal credit score with a much longer history. I can get conventional mortgages relatively easy and cheap, but I've found that it gets much harder after 5 purchases. To keep below this threshold and keep my personal DTI ratio down I always refinance the properties into the LLC so that the company is on the deed AND the note. Just because you put the deed in the LLC's name does not remove the mortgage from your personal name and credit report.

@Adam D Rinehart

This would only allow you to use commercial lending for the refinances, correct? I have looked into the long term rental loans available only to entities and the rates are much higher amortized over shorter periods.

I haven’t been doing this long at all, but so far these numbers make properties that work using personal, conforming residential financing not work from a cash flow perspective. I know this means I just need to look and work harder to find deals that work.

Originally posted by @Jimmy Suszynski :

@Adam D Rinehart

This would only allow you to use commercial lending for the refinances, correct? I have looked into the long term rental loans available only to entities and the rates are much higher amortized over shorter periods.

I haven’t been doing this long at all, but so far these numbers make properties that work using personal, conforming residential financing not work from a cash flow perspective. I know this means I just need to look and work harder to find deals that work.

Correct, you would be using a commercial loan product but that has a few advantages. The first I mentioned above with taking the loan out of your personal name but you can also do business lines of credit much easier than HELOCs on an investment property. You are also correct in that the cash flow could suffer a bit with higher interest rates unless you plan for that higher rate to begin with. Also, the hard or private money used to buy investment properties is almost always more expensive than commercial loans. 
Personally, the hit to cash flow is a short term problem since rents will rise over time and I accept that as a trade off for large chunks of equity coming back to me either as additional reserves or money to buy more property. 

@Jimmy Suszynski

Yup, commercial loans are part of the cost of having the LLC and obtaining/maintaining that limited liability protection. Many people/investors doesn't want to do that and so have a "frankenstein" setup in my opinion where the LLC hold the Title but the loans are conforming residential loans.

@Adam D Rinehart As far as the business Line of Credit is concerned, if I were to hold each property under its own LLC, would I be able to use the equity in those properties for a single line of credit? I planned to have a parent LLC be the sole member of each property-specific LLC (except for those I am working with a partner on).

Originally posted by @Jimmy Suszynski :

@Adam D Rinehart As far as the business Line of Credit is concerned, if I were to hold each property under its own LLC, would I be able to use the equity in those properties for a single line of credit? I planned to have a parent LLC be the sole member of each property-specific LLC (except for those I am working with a partner on).

I'm not qualified to answer that question. My instinct says no though. However, it does sound like something that might be possible with one LLC using a blanket loan that encompasses all of your properties so your drawing off all of your equity, not just a single property. Please take that with a grain of salt on accuracy though, I'm not a CPA or mortgage broker.

 

@Jimmy Suszynski

I looked at this briefly.  I think you need to call around several portfolio lenders and see if one would do that.  Because "commercial loans" aren't really that regulated, it can really depend.  Also, I'm told that you'd need a sizable amount of equity/assets.  One told me that $1M is a really small portfolio loan which most people would bother entertaining.  You need at $5M/$10M and up --- just what one lender told me.

Good luck.

Make sure you talk to your bank about this! One credit union we worked with would not allow it to be transferred to our LLC if we purchased it in our personal names. Another small bank did not care.

@Jeyo Punnakottil

What’s a “ppty?”

Are you asking their commercial loan Dept?  Most lenders are residential lenders, so they originate conforming residential loans.  If Title is held by an entity, then the property is no longer eligible.  For some reason, these lenders never tell you that — maybe inexperience or because they just want to sell you a loan..

Good luck

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