I'm in the process of acquiring a loan for a nice multifamily deal I have going. 55k + 15K rehab gets me a 1650 sqft home with 3 rental units in it currently bringing in $1,500 a month.
This is our second rental property, the first we owner occupied with an FHA. We have now formed an LLC and want to finance this purchase too.
My plan is to acquire the property putting 20 to 25% down, do the renovations, rent it out, and refinance. In reading many blogs on biggerpockets and the books by Brandon Turner it is usually taught to refinance into a nice 30 year fixed rate mortgage.
SO HERE IS MY QUESTION: How do I go about attaining a 30 year fixed if I want this property in an LLC?
As I've been calling local community banks to get a loan and have the property in our LLC all the lenders are offering loans that are shorter than 30 years. The best so far I think was 20 or 25 years with a 5 year adjustable rate. Are 30 year fixed only possible if we personally finance it?
We've even thought through a couple other scenarios, like using 0% APR balance transfers to get the property, fix it, then refinance, or if we could get a 30 year fixed off the bat, rehab it with our CC at 0% and let the cash flow pay them off over the next year, but the bottom line is whatever strategy we use it would be much better with a long term fixed loan.
Any input is appreciated!
Conventional financing is going to give you the 30 year fixed rate loans with the lowest interest rates, but you are required to have the property in your personal name. Otherwise you are subject to the terms of commercial financing. Take a look at an umbrella insurance policy. It is the route I went and what was recommended to me, by my insurance agent.
Mr. Padilla does a good job of explaining the differences between commercial and personal financing. There are, however, additional options. I would consider using whatever local attorney you hired to draw up your LLC to explain the boundaries of "membership contributions" and non-traditional funding of an LLC. It may reduce the reason you have for your LLC to go through the style of funding you are proposing.
@Ben Naughton Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a 203k Loan. A 203k Loan is where the purchase price and rehab costs are rolled into a single loan.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). Because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA, 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You many be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
You need to look into the private lenders such as Lima One Capital and Dwell Finance, etc. that cater to RE investors. You will pay for it but they will lend to an LLC with a 30 yr fixed. Make sure you read the fine print as well because they also come with prepayment penalties and such so you want to ensure they fit your objectives.
@Thomas Franklin Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
What tax advantages are being lost by not closing in an LLC as opposed to closing under your name.
Thanks everyone for the replies.
@Jerry Padilla - So, umbrella would be holding it in our personal name and then having insurance cover both our property and the rental.
@Matthew Kreitzer - Could you give a little more clarity on how it would reduce the reasoning for the style of funding?
@Thomas Franklin - I agree. I have been actively looking for seller financing. This deal was a FSBO but they didnt own it free and clear. I'm currently in a duplex going FHA. It's great having our personal monthly living expenses cut to almost nothing but some of the issues you brought up do concern me. One advantage I see is our homestead exemption by living and owning it personally.
@Edward B. - Thanks, I'm definitely going to look into those guys.
Lawrence N. I could write a book based regarding this topic based, on my experience. To provide you the soundest advice, I would encourage you to seek these answers, from your accountant.
Originally posted by @Ben Naughton :
Thanks everyone for the replies.
- Could you give a little more clarity on how it would reduce the reasoning for the style of funding?
It is less an issue of reducing the reasoning for the style of funding and more reducing the reasoning for having an LLC. When you start bringing on personal obligations, either as a surety, gaurantor, or backer, you remove the asset protection purpose of the LLC. That is why, if you can do it, it is generally a better idea to put funding into the LLC first, and then use the LLC to purchase property. There are very strict guidelines for how members are supposed to fund their LLC, and even significant tax advantages of doing so. For more information on membership funding, I would have to direct you to a local CPA/attorney.
Ben, I have an outlet for a 30 yr fixed for a LLC borrower. This option would require you to have it rehabbed and rented already, as the approval is based on the property's rental income, not yours or your LLC's income.
I typically just broker these in Oklahoma, but I can refer you to someone if this is what you are looking for.
I would also appreciate if I can get a referral to someone who will help with financing LLC that is looking to buy fully rehabbed and rented SFR's and multifamily apartments.
@Scott England - I need to purchase it and rehab it first, but I wouldn't mind the referral information to consider a refi afterwards.
I was speaking with a lender a couple days ago about some loan opportunities. He mentioned that a HomeStyle Renovation loan is similar to a 203k without the live-in requirement. Here's the link to his website that explains it a bit more. Not sure if this is suited to your situation, so hopefully it helps!