If you buy to hold and rent your told to put it in a LLC for protection of the owner but then I am told banks will not
finance properties in a LLC. How do I cash out rinse and repeat to grow while protecting myself as a owner?
@Damian Robinson , banks will definitely finance properties in an LLC. Those loans are considered "commercial" loans and have terms that aren't quite as nice as agency loans that you can take out in your own name. Most people take the agency loan out in their name, deed it to the LLC for protection, then redeed it out of the LLC ahead of time before the want to refi, if need be.
Why hold the properties that your wanting to get Fannie Mae financing terms on, in an LLC for the protection of the shell of the LLC? LLC's and other entities can be easily pierced by any competent attorney who is dead set on getting to you and your personal assets. Heck, just co-mingle personal funds and business funds, even one time and it can be pierced? Then where is your protection? Don't get me wrong, if they are handled correctly, it is an added layer of protection, but what exactly are you protecting from what circumstance?
If you want to get Fannie Mae financing and not have a due on sale clause violation and the potential for the lender to call the note due, you must hold the properties in your personal name. If you hold the properties in your personal name, you can get Fannie Mae financing up to 10 financed properties unless you know more advanced techniques to go beyond 10. I do know the ways to structure things such that Fannie Mae will gladly give you more then 10 financed loans.
The real issue here is protection. I'll take off my loan officer hat and dig into my previous background as an insurance agent to answer the question. To protect yourself, you should set your liability to the highest amount allowed on the landlord policy. Typically this is 500K to 1,000,000 worth of liability protection. I would also follow it up with an umbrella policy for between 1-6 million dollars. The nice thing about liability protection is that they also pay all defense costs associated with a claim against you. Anybody that has been around that litigious world knows that defense costs can be huge at times. The insurance company will pay separate defense costs on your primary policy up to the point where they have paid out the max. liability on that policy. Then the defense cost on the umbrella kick in. There is no limit on what an insurance company will pay, except they will settle if they deem it to expensive to defend. Either way your costs are covered.
In the end, I'm not saying not to put the properties in an entity. However, I think more careful consideration needs to paid attention to what your trying to accomplish in all areas, why your trying to accomplish the goals, a careful analysis of all the risks involved and that will help lead you to the best overall path.
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