After purchase loan to fund return of capital

5 Replies

Hi,

I am making a go at RE investment for the first time, I have some of my own capital that I will be using to pay 100% cash for 2-3 single or small multi unit homes. I will be rolling these homes into an LLC. However, I do not wish to keep all my capital in these properties indefinitely. I would like for the LLC to obtain a "portfolio loan" and then return capital to me from funds obtained from that loan, in effect getting leverage I would have had if loan was taken at first.

The reason I am doing this is I wanted to get in on a hot area quickly, before I could obtain such a loan, and also after ~1 year of history of profit/loss within the LLC my thought is I would get better financing terms for such a loan.

My questions are: does all that sound like something that will work? Namely will a financier be ok loaning an LLC money knowing the use for it is a return of capital? Will the return of capital be seen as such from accounting perspective, and hence not subject to income taxes?

Thanks in advance
A

Yes, that plan can work.  And loan proceeds are not taxable income.

Yes, you can borrow money in an LLC. You will need to find the right lender, though. Few do these loans. Talk to other investors in your area or do a lot of "dialing for dollars" to find a lender. Try smaller, local banks and credit unions. Avoid the big banks.

Loans to an LLC are going to have commercial type terms. That means 15 years, maybe 20 is the longest fixed rate you're likely to get. Shorter terms, ARMs or balloons are a possibility. Rates will be higher the longer you want to lock in the rate. You will also very likely need to give a personal guarantee.

You may need to hold the property 6-12 months if you want to use a new appraisal. You're likely to be limited to 80% LTV at the most, maybe less. If you refi quickly, many lenders will use the price you paid as the value. So, you can get a lot, but not all, of your money back.

The lender is not going to want to do a conventional refinance in the LLC name. They will want it to be in your personal name.

They will usually want a new appraisal with 6-12months seasoning or want to use purchase price as appraised price.

If going the commercial route bank will lend to the LLC. You'll wanna wait 2-3years as they will wanna see rental income on your taxes.

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Hi @Alexander Funaro  - it all depends on the lenders in your area.  As @James Wise alluded to, most conventional lenders will not make loans to your LLC. That being said, I'd encourage you to call literally every single bank within a 75 mile radius of your properties. To that point, it took me 6 months to find a local lender that will lend directly to my LLC for a portfolio of single family homes. It's effectively a commercial loan. That said, he also told me "don't call me unless you're looking for at least $250K."

Sounds like a good plan.

The seasoning on purchase transactions is going away. For example, I have a lender that will do cash out immediately after the purchase is recorded (read: next day)! Do this first to get your money back and THEN put the property in the LLC for the liability. I don't know of too many lenders that will do the loan on a single family unit with an LLC in place.

Commercial multifamily (5+ units) is a different story...

Thanks all for the input, great insights all around

It's a relief that this is possible, it was always my intention to keep roughly 20-25% equity in the properties through the loan process, using the loan to take 75%-80% equity out. My major concern through all this is protecting the money I already have in a worst case scenario of some legal suit transpiring that bankrupted the LLC. If I have 100% equity in it I lose all that, I am willing to pay some interest to share some of that tail risk, especially since I am new to the game. I will also be looking into some umbrella insurance plans as well to supplement.

I was under the impression the whole time the loan would have to be commercial if going to the LLC, I have heard conflicting things about getting conventional mortgages in my name and somehow "rolling" them into an LLC. My plan was buy property in cash, start LLC with an initial investment of the properties, get commercial loan for LLC, take out equity to share risk.