30 year fixed mortgage to LLCs. Am I trying to find a Unicorn?!!

Private Lending & Conventional Mortgage Advice
9yFollow

30 year fixed mortgage to LLCs. Am I trying to find a Unicorn?!!

Kris V.
South East US · Member since 2016 · 10 posts · 7 votes

Hello BP!

Full disclosure - Newbie investor trying to find the best combination of asset protection and lending terms.

I have been talking to a few lenders in the Minneapolis, Minnesota area to line up my finances before I buy my first Buy and Hold property (end of Summer /early Fall). What I have been finding is that lenders will do loans in LLC names but they are commercial loans. 25 year loan term, 5 year reset/balloon. So far I have talked to 4 different lenders and everyone says the same thing.

What I assumed(perhaps a wrong one!) is that I could have 30 year fixed mortgage in a LLC name as long as I backup the loan in my personal name.

The reason for LLC was asset protection, but with 5 year resets and being at the mercy of a lender to hike the rate that is too much of a risk that I am not willing to take, not to mention the higher rates and closing fees associated (especially for buy and hold long term rentals + in the fed's decision to start raising rates).

So, to summarize here are the two options that I can come up with

Option 1 - If you want asset protection you can buy in an LLC(for each property) BUT can only get commercial loans that reset every 5/10 years with 20-25 year loan term.

Option 2 - Buy in your name, get 30 year fixed mortgages. Load up on Liability insurance.

Here are my questions

  1. What other options exist?
  2. If you go with Option 2(in your name), would the bank stop at 10 properties?
  3. How do you go beyond 10 or 4 properties? Go to Option 1(Commercial /Portfolio loans with balloon resets)?
  4. If you go with Option 2, would I better to buy properties in my name first max that out and then start to buy properties in my wife's name (as we both have W2 incomes and will keep the full time jobs). 
  5. Option 2, I would not start buying properties as Joint Owners?

Look forward to the feedback from the community!

1Reply
58 views

Most Popular Reply

Jeff B.
Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
9y

The LLC does add complications. My 25yr arm commercial on a 6-plex is looking to be a rare breed too.

The legal entity can come-n-go, but the real person is here for the 'duration' and does get better consideration. Working with the local business bank as-a-person goes much further than an LLC attempting the same deal.

We all went to those lectures on "asset protection" and many (including my self) took the bait.  After several years it dawned upon me  that the entity was only an extra expense and was feeding the lawyers, so I dumped the S-Corp and the junior LLCs and continued for decades w/o issues - - but that requires one to be extra viligant in keeping up with regulations AND to work well with people.

4Reply
See this reply in the discussion

22 Replies

Jump to latestLatest
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    The LLC does add complications. My 25yr arm commercial on a 6-plex is looking to be a rare breed too.

    The legal entity can come-n-go, but the real person is here for the 'duration' and does get better consideration. Working with the local business bank as-a-person goes much further than an LLC attempting the same deal.

    We all went to those lectures on "asset protection" and many (including my self) took the bait.  After several years it dawned upon me  that the entity was only an extra expense and was feeding the lawyers, so I dumped the S-Corp and the junior LLCs and continued for decades w/o issues - - but that requires one to be extra viligant in keeping up with regulations AND to work well with people.

    4Reply
  • Kris V.
    OP
    South East US · Member since 2016 · 10 posts · 7 votes
    9y

    Thanks for your input @Jeff B. 25 year ARM wow! I assumed loans to LLC/entity vs individual would have higher points, closing fees/higher rates but did not expect rates to reset every 5 years!

    0Reply
  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    9y

    @Kris V. A 30 yr fixed loan on an investment property at a local bank is not likely at all. I do see some 15 yr fixed notes, but most newer investors don't want 15 yr because it eats up cashflow.

    You can finance traditionally with a conventional lender where you get the absolute best pricing and terms, you have to close in your  personal name on title be can deed it to your entity for the asset protection. There is the due on sale but it is my opinion only that the likelihood of it being called is so incredibly low, higher chance of a slip and fall.

    Don't worry about being limited by the number of mortgages you can get - fannie stops at 10, but when you have a local bank you can get as many as you need (and if they stop go else where). I am financing with banks now on my 13th and 14th purchase - it is way easier than mortgage lenders. Costs a little more, but am getting 15 yr fixed to my entity. 

    Regardless of who is on title the banks are requiring personal guarantees.

    Good Luck!

    1Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    I don't do any LLC's. I have a $7,000,000 umbrella that costs less per year than Llc maintenance costs. Not to mention no initial set up fees, no additional paperwork, no additional tax preparation fees, etc. your understanding of buying in your name with some and under your wife's name is not exactly correct either.

    I have a broker that can take me to 20 properties on a fixed basis, just at a higher rate after the 10th.  My question is why would you want more than 10 if you can make enough on those?  More properties equals much more work-LOL

    1Reply
  • Kris V.
    OP
    South East US · Member since 2016 · 10 posts · 7 votes
    9y

    @Bruce Runn Thanks for chiming in! Can you please elaborate "your understanding of buying in your name with some and under your wife's name is not exactly correct either"

    @Travis Sperr

    @Travis Sperr Thanks for the feedback. 

    1Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Bruce Runn for a single owner of an LLC the annual cost is $0 unless you want to pay someone to update your MN annual renewal which has to be done online. A single owner LLC is a disregarded entity for tax purposes and files as if you don't have an LLC. Income/Expenses are listed on Schedule-E. There are setup costs involved however as long as you aren't bent over they aren't too bad.

    @Kris V. as @Travis Sperr mentioned many lenders will allow you to get the loan in your name with conventional financing, close on the loan, then deed the property to the LLC. You will still be guaranteed on the debt but it would transfer ownership to the LLC. May be worth talking to your bank about.

    The comment about you and your wife splitting properties probably doesn't matter because you may have to use her income to qualify for loans as it is.  Sure you could both get 10 loans but you mention you are a newbie so I presume this is an issue you would cross long down the road.  

    0Reply
  • Kris V.
    OP
    South East US · Member since 2016 · 10 posts · 7 votes
    9y

    @John Woodrich Thanks for the feebcak! Yes a newbie but dont want to look back years from now and say wish I structured the loans differently, so are you saying it does not matter if you buy jointly or not the same limitations apply or are you saying buy in my name run up to 10 and switch to my wifes name then buy 10 more?

    0Reply
  • Kris V.
    OP
    South East US · Member since 2016 · 10 posts · 7 votes
    9y

    @John Woodrich I will talk to the bankers about transferring ownership as well. 

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Kris V. As I am aware the loan limits are 10 per person but as mentioned above, there are other lenders who will go higher.  If you can finance property in one name and not the other, great, you have a loan and your wife doesn't.  It counts against your 10 but not hers.

    If you have 10 successful properties and are looking to get an 11th you will be in good enough shape to refinance anything you already have.  There are many aspects in RE that have to be planned for but if you are still looking at purchasing your first property your time is probably better spent on other things.  A lot of banking is black and white, if the numbers work they work.  If your numbers and your debt to income continue to work, your ability to purchase properties will continue to exist.

    0Reply
  • Dan Bryskin
    Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
    9y

    @Kris V.

    Hold properties personalty to get the best finance terms. Use LLC to rent. Rent to LLC, have it on one your wife / brother name, make LLC a landlord. Use friendly lean strategy to strip equity from your assets and hold it in separate entity and load up on coverage. That's my strategy. Good luck

    0Reply
  • Account Closed
    Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes
    9y

    You need to find a portfolio lender. I operate as a single member LLC. I talked to banker this afternoon that is anxious to do business with me. Essentially, the way it would work is the loan would be in the name of the LLC with myself as the guarantor. We decided I needed to wait, but I walked out the door with a sheet of paper giving loan estimates - while not fixed rate loans, I was provided two options today-

    30 year adjustable after 7 years with 4.125% interest rate and $3,272.50 in closing costs (including one point)

    30 year adjustable after 5 years with 3.875 interest rate and $3,272.50 in closing costs (including one point)

    They require 1 year seasoning on an appraised  refinanced cash out, or can do an immediate cash out based on purchase price plus fix up costs.  That didn't work for me because the only house I have in their lending area has a basis of $50k with an estimated value of $84k.  I'm waiting until I get through the seasoning (another 5 months) before I cash out.

    They also require that you establish a banking relationship with them (personal and business accounts).

    This was at 1st Bank in Denver (efirstbank.com).  What I would do is go old school- find a portfolio lender that does business where your rentals are and establish a business relationship with them.  Get to know the folks there, talk with them, see what they can do for you. Stay away from big box banks or online banks.

    1Reply
  • Bruce Runn
    Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes
    9y

    @John Woodrich

    @Kris V.

    My comment on putting things in your name and some in your wife's is almost identical to John's. Almost all people run into a debt to income ratio problem before they hit 10 properties and you will most likely need your wife's income to make purchases work because of DTI requirements as it gets more and more difficult as you accumulate properties-voice of experience-LOL

    1Reply
  • Travis Sperr
    Lender · Denver, CO · Member since 2009 · 1k+ posts · 597 votes
    9y

    @Kris V. Buying properties in you and your wifes name separately is a good way to get started, my wife and I did that early on - the best part was that we might both have a BRRRR going in our individual names and when it came time to refi - we could both use the same joint savings account to show reserves/assets on two different loans. I am self employed and she had strong w2 income so it worked really well. As others have noted once you get more experience you will find that it really doesn't matter as there are no property limits for qualified borrowers.

    0Reply
  • Marc Jolicoeur
    Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
    9y

    @Dan Bryskin I'm not too sure why we need to put the LLC in your brother's name. Can you elaborate on that? Also how to do a friendly lien that will not be canceled by a judge?

    Have I got your strategy right in the steps below?

    1 - Buy and hold title in your name(s) as tenants in common.  Get conventional investor mortgage.

    2 - Create an LLC (eg. 123 Main Street)

    3 - Create lease document between owner(s) and LLC. Rent to the LLC

    4 - LLC rents to tenants and manages the property

    5 - LLC gets insurance for the property with large liability coverage

    6 - Annual renewal of the LLC and file tax returns (if multi-member).

    7 - As equity in the property increases, get a HELOC or HEL. Use the proceeds to buy more properties or notes that pay more than your payments.

    0Reply
  • Dan Bryskin
    Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
    9y

    @Marc Jolicoeur

    Good questions: 

    1. With my brother we split assets and possible unknown liabilities. One has all assets, the other all liabilities. So one holds all properties while another has a rental company.

    2. Yes

    3. Yes. Properties are rented to an LLC on multiyear agreement. LLC is a management company and has rights to rent properties. So, one with the assets not in the "risky" rental business.

    4. Yes

    5. Yes

    6. Yes

    7. Enter a friendly lien strategy. There is another company. It is a finance arm. It has liens on all of the property. This way property has no equity or even negative. All equity belongs to a finance arm. My rational - lenders dot't get sued if something happens on the property. If we need to finance something - lien gets released. No structure is perfect, but the good one will be a pain in the butt to pierce. 

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Dan Bryskin I am not totally sold on your structure.  That presumes that the management company is going to get sued by damage caused by a property.  The management company would not be negligent if faulty wiring caused a fire.  Another example, let's say I own one property and have renter's warehouse manage it.  If the roof collapses - are going to sue me or are they going to sue renter's warehouse?  The easy answer appears to be renter's warehouse (bigger pockets) but their contracts will protect them from this and in court they would not be negligent for the damages anyhow...  In practice we see a lot of structuring and many times it begs the question whether it holds any relevance.

    If you indeed are holding all of your assets in one LLC I would talk to your attorney about your structure. The premise of using LLCs in real estate is to separate risk. In this case you have all of your assets in the same risk pool.

    Last - when is the last time anyone has heard of an claim wiping someone out? Any claim would have to be in excess of insurance limits... We keep our properties in a decent state of repair, the odds of us being negligent and causing a claim seem very remote. That and the fact that I have never heard of it happening. With that being said, I still use LLC but it only costs $155 to set one up. Can't hurt.

    0Reply
  • Dan Bryskin
    Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
    9y

    @John Woodrich

    Best defense strategy is a multilayered one. 

    Layer one: Exposed guy is behind an LLC. If landlord is found negligible, it is a limited liability company. Landlord has no assets. Say they pierce that

    Layer two: they go after the owner. Say owner has been found negligible. His defense- property was under the master lease. LLC was held by some else and was responsible for everything, as documents clearly state. They pierce that.

    Layer three. Owner has the property, but property has no equity, say upside down. Equity belongs to two lenders. One is the bank, another one is our finance arm. They have to pierce another corporation. But lender had nothing to do with the property or tenants,  Thats first two guys. What would finance company be found negligible for? It only does lending.

    Thats what I came up with to manage my risk. Better ideas?

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Dan Bryskin I understand what the plan is however I am not sure that the plan will hold any legal effect.  If an attorney has set you up with solid contracts, if all transactions are at arm's length, if all entities are being accounted for and operated as separate legal entities, etc it may work.  If you set this up with advice from an attorney you can be a little more assured as well.  If you set it up with advice on here I would be less confident.

    At a minimum you could add separation in your "Asset" LLC but putting each property in their own LLC owned by a parent LLC but that only provides you with as much protection as the rest of the structure.

    if you are doing this with your brother one begs the question whether the transfer of assets into another person's name causes gift or income tax consequences...  At the same time, the transfer of ownership may mean nothing if the benefits of ownership have not been transferred...

    The more assets in play, the more risk and the cheaper the cost of an hour long consultation with a real estate attorney.

    2Reply
  • Dan Bryskin
    Investor · Minneapolis, MN · Member since 2015 · 252 posts · 263 votes
    9y

    @John Woodrich

    For us, it is actually a bit more complicated then stated. We have a flipping company and a construction company. Ideas I shared - it took me years. The reason I share - is to see if anybody has better ideas, or can poke holes in mine. Attorneys - they modified my documents, but did't come up with better ideas yet. 

    1Reply
  • Kris V.
    OP
    South East US · Member since 2016 · 10 posts · 7 votes
    9y

    @Bruce Runn @John Woodrich Thanks for the clarifications! @Travis Sperr That is a great idea to have the same joint account as assets for diff loans. 

    @Dan Bryskin Thank you for sharing your unique solution to this. I am going to research this further...but I have to remind myself that I have bigger fish to fry than to worry about these things:)

    @Marc Jolicoeur Good to see you buddy! Great questions thanks for asking!

    0Reply
  • John Woodrich
    Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @Dan Bryskin I understand.  It takes some thinking to get to where you ended up and it sounds like a good plan.  Let's hope none of us have to need excess liability protection for our investments!

    We advise on entity structure with objectives of limiting liability and tax strategy however we could lose our CPA licenses if we were practicing law so we are careful not to over-step our boundaries in issuing opinions on legal matters.  Plus attorneys are a referral source for more work so it is nice to kick work their way once in a while.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free