BRRRR Deal - Conventional vs. Commercial Loan Refi

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I’m a few days away from sending out my first direct mail campaign. I’m focusing on one specific town and I’m targeting duplexes with out of state owners. I’m hoping to purchase a BRRRR deal out of the mailing.

I have a few hard money lenders lined up for the initial purchase, but they only lend to business entities and not individuals. That’s not a problem since my plan was to form an LLC anyway to stay protected.

Here’s my question on the refinance. Once I purchase the property and get it rehabbed and rented, when I refi do I now need to get a commercial loan since it’s in an LLC or should I look to transfer title back to my personal name and get a conventional loan and then move it back to the LLC? Is this even possible? What are the advantages/disadvantages of residential vs. commercial loans?

I do want to note that I’m looking to work with a local portfolio lender and I do plan to scale my business to acquire 10+ properties in the next few years.

Thanks in advance.

@Matt Suchoski , my understanding is that keeping the title in the LLC won't be a problem, but a conventional bank will expect you to personally guarantee the loan. The exception may be if the LLC has a track record of as a successful business.

Ah, the age old question of to put it in an LLC and finance it via commercial or portfolio money or to hold personally and get a Fannie Mae loan? Well, in the end, there is no one size fits all answer here. The LLC does afford you some level of protection and depending on how the LLC is taxed (as a partnership or a Sub S election) there may be some advantages that way as well?

Now, any good attorney can pierce the shell of the corporation and thereby get to you and your personal assets in most cases. So in cases of this nature, the theory that the LLC gives you protection, may not always be the case? But in most cases, yes it can give your personal assets protection

If you do hold them in your personal name, I would suggest that your insurance policy has the highest amount of liability coverage that you can get and that you follow that up with an umbrella policy for 1-5 million beyond that. The landlord policy and the umbrella policy both pay defense costs outside the liability limits and technically there is no limits on defense costs. However any insurance company would work to limit their defense costs by settling if they thought it could cost them more in the long run to defend it. 

Now on to the financing differences. You will get your best rates and terms with a conventional Fannie Mae loan versus the terms typically available on commercial & portfolio loans. Fannie Mae has a 10 financed property rule, however with some planning, you can get around that rule and finance as many Fannie Mae loans as you may ever want. I will elaborate on that later in this thread if anybody wants me to. 

The key that most borrowers are looking for is the best rates and terms without having a million hoops to jump through that is consistent and repeatable. So depending on your specific needs and desires, you will come to the best decision based on those parameters. 

@Jaysen Medhurst - Good to know. Thank you.

@Kevin R. - Great feedback. I'll be sure to have my insurance broker provide me with quotes for the various scenarios/coverage levels. Perhaps this will help make the decision process easier. And yes, I'm certainly looking for the best rates and terms while at the same time setting myself up to be able to scale in the future.

@Matt Suchoski if you are looking to scale and wanting the best rates and terms then you need to show the best numbers you can. Basically, you will probably want a 30 year personal mortgage. You get cheaper interest, longer amortization, and a fixed rate. Also, insurance for an LLC is substantially worse for the same or higher cost.

Check to see what the costs/taxes are to change the ownership of the property. I believe some states consider it a sale and try to charge a bunch of money again. Otherwise, it's probably best to secure long-term financing personally so you have the ability to scale, then as you approach your limit start looking to blanket finance or just continue under the LLC. There is no reason to slow yourself down in the beginning.

@Bryan O. - Great feedback. And good point on the transfer of ownership. I’ll have to look into PA regulations. I don’t necessarily want this process to hinder my first purchase, but at the same time a little due diligence up front to make sure I’m properly structured can certainly save a lot of headache and money down the road.

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