Use Holding Company LLC To Apply For Mortgages

8 Replies

Getting started in real estate investing.  Trying to figure out how to structure what I'm hoping to build.

I've owned a decently successful online retail business for 10 years.  I understand, and have read more about this in regards to real estate, the problems with obtaining business credit.

My initial thought is to register a new LLC as a holding company. I'd do the regular routine of tradelines and charge cards to build some credit. Then, I'd find a property and apply for a mortgage under the LLC. I realize that I'd probably have to give a personal guarantee on this. The tricky part comes when I'm ready for property #2. Hopefully, I'd be able to get the next mortgage, as long as I have good cash flow, through the LLC. It may take more than one property under my belt. Regardless, if I wanted to keep separate LLC's for each individual property, could I make that happen? I'm guessing there are due on sale clauses if I tried to quit claim from Holding Company LLC to Property A LLC?
 
I thought I might just spin off my current business to it's own new LLC and use my current LLC, with it's credit, as my Real Estate Holding LLC.  But, regardless, the same questions arise.

I realize I may be making the real estate business sound much simpler than it is, and will of course talk to a CPA an attorney before I do anything.  But, just like planning things as much as I can.

Thoughts?

Thanks!

I know lots of people that have become wealthy with real estate. Not one of them has ever done it by building business lines of credit. Most use their personal good name to achieve the loans required, even if it is a non-recourse loan to a brand new LLC.

My point is, it is easier to get loans by improving your own credit score than it would be to build the history needed in an LLC to have the LLC qualify.

Originally posted by @Greg Scott :

I know lots of people that have become wealthy with real estate. Not one of them has ever done it by building business lines of credit. Most use their personal good name to achieve the loans required, even if it is a non-recourse loan to a brand new LLC.

My point is, it is easier to get loans by improving your own credit score than it would be to build the history needed in an LLC to have the LLC qualify.

Thanks for your reply.  My personal credit score doesn't have much more room for improvement.  As I said in my original questions, I planned on using a personal guarantee to start.  The business owner in me has some desire to keep business activity separate I guess.
My main quandary is if I do build enough business credit in the holding company, would it be all for naught if I just planned on keeping every property in a separate LLC? Would I be able to transfer a property bought by a holding company mortgage to it's own LLC without any big hassle?

 

Generally the business line of credit idea is sold by gurus to people that are broke with poor credit. In my opinion, that is a dead-end idea, not used by any successful real estate investors that I know. You will do better if you completely forget that concept.

The real estate world revolves around the reputation of the people backing the transactions.

@Tommy Dee

This seems similar to this recent thread:

https://www.biggerpockets.com/...

At the end of the day, you need income, be it personal or business, to support getting a loan.  Business credit / credit history is different from getting an actual mortgage (that is discussed in the referenced thread).

This is called "investing" for a reason.  Good luck. 

@Tommy Dee

Oh, I should wonder/mention have you realized that legal entities, such as LLC's, are not eligble for conforming residential loans? You'll have to get a commercial loan which has higher interest rates and generally poorer terms. Let's face it, the more you try to "make up" income, the more expensive it gets.

@Tommy Dee I’ve applied for and received real estate loans in the name of LLCs that are brand new. Of course I had to sign personally as well. The banks only care that the property will make money and that you have a decent financial track record to back up the loan.

As someone else pointed out though, loans to LLCs are almost always commercial loans with shorter amortization periods, higher interest rates and shorter terms, so in the interest of just getting yourself started sooner rather than later, just buy your first couple properties in your own name.

Originally posted by @Greg Scott :
Generally the business line of credit idea is sold by gurus to people that are broke with poor credit. In my opinion, that is a dead-end idea, not used by any successful real estate investors that I know. You will do better if you completely forget that concept.

The real estate world revolves around the reputation of the people backing the transactions.

I appreciate your insight. What about the decent number of people I see who advocate using an LLC for asset protection? Do they obtain their loans under the LLC but with a personal guarantee? Or, do they obtain the loan themselves and then transfer?

I understand the whole umbrella insurance vs. LLC argument.  I plan on doing both.

 

@Tommy Dee

While there are a number of posts about getting a personal loan then quit claiming the deed, don't.. you can do it, but it really does screw you up. There are many posts, many I've written, about how that screws you up with both co-mingling and alter-ego thus piercing your corporate veil. if you really want the limited liability protection, then you need to have the loan against the LLC, not you personally. The LLC, for any operation, only insulates you from what it owns.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you