The BRRR strategy with an LLC?

Question

I am desperately seeking a solution to this problem and no internet research has provided an answer that I have found:

Myself and two partners have been acquiring rental properties using 25% down conventional financing under our personal names. Because we have quite a few, we have been skirting the 10 mortgage limit by rotating names to put on each mortgage, essentially allowing us to acquire 30 mortgages.

We are essentially funding each other's personal properties and operating under a general partnership agreement, and mitigating risk by sharing P and Ls evenly between all units. All is going well.....

Except, the general partnership is providing a lot of personal risk exposure, and now that we are switching strategies to the BRRR strategy, managing the rehabs ourselves, and going after larger projects, it has become clear that we need a business entity behind us. Preferably an LLC.

Here's the problem.

No lender I have spoken with thus far will fund to an LLC in a way that the BRRR strategy will work. We need some kind of an equivalent to an 80% cash out refinance after the rehab and a six month seasoning period to repay our hard money loans, then convert to mortgages that do not have crazy high interest rates as we intend to keep these properties and cash flow...

Anyone have any experience and solutions for this? Is portfolio lending an option to an LLC? Will they still do cash out Refis?

James Masotti · Answer

@Tyler Haskell - You need to shop around. Of the 30+ lending institutions I've spoken to only 3 of them would allow me to do a 70-75% LTV cash out refinance with no seasoning so long as I had a signed lease in place. Everyone else would only allow me to 70% of my cash basis (~49% LTV) unless I seasoned for some amount of time. So...my point is the lender your seeking is out there...you'll just need to dig much more to find them. Also understand that with commercial LLC financing your terms will not be as attractive. I'm mostly looking at 5/15, 5/20, or at best 5/25 financing. I might have an option for 10/20 with 1 rate reset at 5 years which is pretty solid if I can lock it down. If you have a larger apartment deal or portfolio you may be able to find someone that would go straight 20 or 25 years...you will also be paying a higher interest rate 4.75-6% right now depending on what you're doing and who you do it with.

Patrick O'Shea · Answer

@James Masotti any idea when the "more solid the underwriting (i.e. more you put down and more experience you have)" kicks in?  I got my first commercial loan earlier this year and was slightly disappointed with the terms (5/20). I'm looking forward to when my "interest rate will typically start to go down and you'll qualify for fixed fully amortized 20 and 25-year loans." Are we talking 2nd or 5th mortgage? Just curious if you could add more color to that post...

James Masotti · Answer

Great call @Steve Babiak! Most of the banks I've talked to require anyone with 20% or greater equity in the LLC to guarantee and/or provide personal financial disclosures.

Steve Babiak · Answer

One thing @James Masotti did not state is that these loans will require a personal guarantee from the LLC membership; if your LLC has multiple members, then all of them will have to give their personal guarantee (unless perhaps when some member has a tiny interest in the LLC).

James Masotti · Answer

@William R. - You nailed it...most commercial loans for beginners are going to have a ballon payment due after 5 years, with the actual loan schedule being paid off over either a 15, 20, or maybe 25 year amortization. I've come across two banks that will allow for a 10 year ballon payment but with a rate reset at 5 years.

The more solid the underwriting (i.e. more you put down and more experience you have) your interest rate will typically start to go down and you'll qualify for fixed fully amortized 20 and 25 year loans.

Hope that helps clarify a bit. I'm relatively new to all this as well but let me know if you have any other questions and I'll do my best to answer with the limited knowledge and perspective I've accumulated.

William R. · Answer

@James Masotti: I appreciate your responses. What do you mean by 5/15, 5/20, 5/25 and 10/20?  I understand that there are not many fixed rate options for commercial loans, so when the interest rate resets how is it calculated?

Tyler Haskell · Answer

@James Masotti

Really great information James thank you! I have started the search for this type of lender and plan to present my strategy to them.

James Masotti · Answer

@Tyler Haskell - Commercial lending is indeed friendlier in the sense that there are much fewer government regulations that simply restrict you to do or not do something in black and white terms. However unlike residential lending there is no government backstop to the mortgage. The underwriting process is there fore streamlined much more in my mind because once a lending institution establishes what their underwriting criteria are...it's actually pretty easy for them to evaluate a deal. Likewise they are able to take more things into account, such as how organized you are when you submit your application. If the loan officer gets a sense that you "get it" and the underwriter can tell that you've presenting things in a way that makes it easy for them to understand your deal...they will have more confidence in your ability to manage your business and therefore loan to you. @Brandon Turner tells the story of walking into a bank with just a pile of messy papers and asking for a loan because he knew he had a great deal but then he'd be turned away, as soon as he realized it wasn't the deal they were saying no to but rather Brandon himself. He started to get organized and actually presented them with a deal "presentation" once he did this he started getting a lot more yes's. Brandon's deal didn't change nor did his financials...but the way he presented himself and the deal did and that can help make the difference.

Tyler Haskell · Answer

@Chris Mason thanks for the input. I think I'm trying to avoid hml for the long term loans, but I'll look around for sure.

@James Masotti okay so we need to look really hard for portfolio lender or a lender who will do this with an LLC and your saying either way it will be commercial. I always understood commercial lending to be friendlier, but it seems I was mistaken. The fact that you are getting 70% with no seasoning is encouraging. Thanks for your response!

Chris Mason · Answer

It'll be more like 65% or 75% LTV for the most part, and HML, but otherwise yeah it can be done...

Your saving grace is the experience level. HML care a LOT about that.

The BRRR strategy with an LLC?

Most Popular Reply