Mortgage on property owned by LLC in Southern California?
Investor · San Diego, CA · Member since 2014 · 254 posts · 56 votes
Hi all,
It's been a while since I've posted on BP! Moved to San Diego and considering heavily investing out here. Doing some research though I've found only one bank which will fund the purchase of a residential property under an LLC. Everyone else requires you buy in your name and deed the property to the LLC after. I'd rather not do that - with rates climbing (maybe) it seems more likely that banks will try to invoke the due on sale clause - among other things.
That said, who in the San Diego county is buying property under their LLC? And what banks are you using? I'd appreciate a referral!
Thanks,
John
@John Matthews I went through this exercise about 3 years ago while trying to manage some of the same issues you mentioned - #3 in particular, and also because at least one of our properties didn't fit into a nice Fannie Mae box (urban residential use, but think of a tenant running a small hair styling business). No representation of any objectively "right" answer, but sharing mine...
On #1, there's no significant cost here to transfer properties between entities so long as the individuals involved have the same ownership. This is self-declared on a simple form. Detail, details, but transfer tax isn't a problem.
On #2. True. But, in my experience, the high cost of property here is precisely the reason that great financing and leverage is SOOO important. I mostly buy, develop, then hold ... the difference between a 4.5% loan on $1M and a 5.5% loan on the same is big on both the P&L. I intentionally leave room for more Fannie loans for future use, but I use them aggressively to juice the returns. Also, the origination costs are SO much lower for Fannie loans, in my experience.
On #3. I haven't had this problem, but it sounds specific to the numbers/strategy being used.
On #4. This could be an issue if you're using partner money to purchase. Hard to get a Fannie loan if you can't prove the money is yours without restriction. This is also a strategy thing, though - how much value is being added and how long is that taking.
In case you're curious where I landed for the rental portfolio, I ended up with an LLC, but mostly titling the properties, once stable, personally. Neither I nor my counsel believe I'd personally escape involvement in any significant liability event, so it's really just about reducing the equation.
For context, I self-manage and am talking about portfolio size +/- 15 doors.
@John Matthews the loan type you should be looking for is a "portfolio" loan then. That's a loan that is written from the bank's own portfolio of funds. Sometimes a bank might refer to it as their commercial loans. The small to mid-sized banks will be the easier banks to find these at - community banks and what-not. Call around to use that type of a loan and you can buy and close in an LLC name. Be ready to pay a higher rate though. Or maybe an adjustable rate. Or maybe even a 15 year or 20 year term (which makes your payment higher). And sometimes all three. I have seen portfolio loans at 15 years, with adjustable rates at 5.5%. Keep in mind that this money is the bank's own money. So there is a limit to it. So while it is more flexible lending, you will pay a premium for it. The more generous termed loans are the "conventional" loans (loans governed by Fannie Mae and Freddie Mac). But those do require you to close in your own name.
HOWEVER...if the due on sale clause is your only concern then this probably shouldn't be a real concern at all. As a previous poster suggested most people haven't read the clause (i've attached some screen shots here for your reference) but it essentially states the bank MAY call the note due. And if they do they must give you MINIMUM of 30 days to fix it...and that's if it's even legal in your state (in some states it is not). The truth behind this clause is that the bank won't care about you switching title as long as you pay on time. The bank makes a TON of money on interest with these loans. They lose money when they foreclose. If you don't pay on time, the due on sale clause does help the bank to foreclose on you easier since foreclosing is so difficult now. Pay on time and you will be ok. Feel free to ask more questions if you need. Thanks!
@Andrew Postell & @Account Closed thanks for the replies. Yes, I am used to getting portfolio loans back east and haven't had success finding a bank which does these - that said, I neglected to call them portfolio loans when I spoke with the individual banks. I'll keep asking around and be sure to use this terminology in the future.
I am fine with these rates - and that's what I'm used to. 5-5.5% with a 25 year amortized loan over a 15 year period, adjustable every 5 years. Definitely not great terms, but there are a few upsides:
1. In Philadelphia, PA in order to deed the property under my own name I'd have to pay a 4% transfer tax. Someone can jump in here, but it seems like San Diego County doesn't have a transfer tax (yet), but just in case this is less than desirable.
2. Because they're all portolio loans they don't show up on my credit report, so if I wanted, even though I own 15 units (9 properties) I could still have 10 mortgages with fannie / freddie. This probably isn't a huge deal as I can always refinance into a blanket loan later, so I acknowledge this is really a personal issue that I should get over.
3. Similar to 2 above - since they don't show up on my credit report, it doesn't affect my DTI since I personally don't have any debt. Yes, it does affect my income, but as you both probably know, the more debt you get, the worse off your DTI becomes, even if your income rises commensurate. Example: $50k W2 income. Then buy house with a mortgage of $500/mo, monthly net income (before debt service) of $600/mo. Add in monthly rent of $1000/mo. Now my income is $57,200 but my debt is $18000 annually. My DTI before buying the rental property is 24%: Add in monthly rent of $1000 DTI = 31.5% for a jump of 11%. . If instead I buy with a portfolio loan, then there's no debt - it comes through as income or expense from the business. In this case my annual income is now $50k+$100*12=$51,200 and my debt is $12000/yr for a DTI of 23.5% or a slight drop in DTI. After 4 of the above properties using a conventional loan I've hit a DTI of 46%. If instead I bought them with a portfolio loan I've got a DTI of 22%. The ability for growth outweighs the added loan cost for me.
4. Cash seasoning / downpayment requirements. Again, banks I've worked with in the past haven't had a requirement for how long the cash was seasoned if it was used to purchase a rental. It hasn't usually been an issue since I usually buy with private money under value then refi into a bank loan, but occasionally I do. I understand why these requirements are in place, and I'd never recommend that anyone do anything shady to come up with the down payment, but it does open up more options.
And I agree, it's unlikely that the banks will call the note due, I'd rather not tempt them. 30 days notification isn't all that long and if I have to deed it back into my name, to satisfy the bank what then? Keep it in my name and lose the LLC protection? I'm putting this at the bottom since really if this were the only issue I'd probably be ok with it.
With all of that said, I'm open to being convinced that my line of thinking is flawed or that I'm missing something, so please chime in, I won't be offended :-)
As for the liability thing, yes an LLC isn't bullet proof, but then neither is insurance. I have both, and still it's not perfect, but I'm happy with the level of liability protection that I have currently.
@John Matthews I went through this exercise about 3 years ago while trying to manage some of the same issues you mentioned - #3 in particular, and also because at least one of our properties didn't fit into a nice Fannie Mae box (urban residential use, but think of a tenant running a small hair styling business). No representation of any objectively "right" answer, but sharing mine...
On #1, there's no significant cost here to transfer properties between entities so long as the individuals involved have the same ownership. This is self-declared on a simple form. Detail, details, but transfer tax isn't a problem.
On #2. True. But, in my experience, the high cost of property here is precisely the reason that great financing and leverage is SOOO important. I mostly buy, develop, then hold ... the difference between a 4.5% loan on $1M and a 5.5% loan on the same is big on both the P&L. I intentionally leave room for more Fannie loans for future use, but I use them aggressively to juice the returns. Also, the origination costs are SO much lower for Fannie loans, in my experience.
On #3. I haven't had this problem, but it sounds specific to the numbers/strategy being used.
On #4. This could be an issue if you're using partner money to purchase. Hard to get a Fannie loan if you can't prove the money is yours without restriction. This is also a strategy thing, though - how much value is being added and how long is that taking.
In case you're curious where I landed for the rental portfolio, I ended up with an LLC, but mostly titling the properties, once stable, personally. Neither I nor my counsel believe I'd personally escape involvement in any significant liability event, so it's really just about reducing the equation.
For context, I self-manage and am talking about portfolio size +/- 15 doors.
Why do you want it under an LLC?
Your personal DTI is the same regardless of if it's in your name or an LLC. LLC debt is still your debt unless you don't own the LLC. And assuming it's a recourse loan, it really does fall on your personal books.
We have a portfolio product that will go for LLCs.
@Justin R. - Thanks for the info and thoughts, I am definitely giving "is LLC necessary" some consideration.
1# - Great. This is very small, so good to know. That said, if I want to refinance after transfered to LLC, is it the same cost to transfer deed out of my name? I like buying properties under value and refinancing out my position to maximize my ROI.
2# - Makes sense. I'm looking at the $400k range. $1M properties just don't make sense for me from a cashflow standpoint (but again - maybe I'm looking at this wrong?) unless I look at true multifamilies, in which case this discusison is kinda moot.
3# - Maybe it's not an issue in reality, but my DTI at this point should be just over 40% and it's never been an issue. But perhaps my lender just hasn't cared.
4# - Right, definitely a strategy thing. Suffice it to say with about $30k in the bank at the beginning of 2015 and a 5 figure W2, I was able to acquire 15 doors by the end of 2015 (starting from 0). Philadelphia is a VERY different market than San Diego and lots of them were with hard money / private money -> rehab/stabilize -> refi but not all. Not sure I would've been able to do this a traditional route.
As a non-LLC do you still have to pay the $800 "doing business in CA" tax?
1 The fee to transfer title is just the paperwork fee. Something like $21, regardless of whether you're transferring in or out of the LLC
2 The $1M range I'm referring to would have to be a quad or tri to make sense for me (so Fannie financing still applies)... though I suppose people doing other than long term traditional rental homes could find other cases that could make sense?
4 Good for you, man ... that's awesome to pull off in one year. It's definitely different market dynamics here - a "door" here implies something much different than in many other places. It's a poker game with same rules, but different blinds and players on different strategies (hopefully you're familiar with poker for the analogy). :)