Can I get a commercial loan on a residential property?

13 Replies

I am trying to get around the 10 mortgage limitation that most banks have these days. My partner and I are buying distressed multifamily (2 - 4 units) with hard money, rehabbing the properties, putting good tenants in place, and then refinancing (not necessarily cash out refi, though would like the option when it makes sense). We are holding the properties.

So my questions are, is it possible to get a commercial loan, so that the note will be in the name of our LLC (and we don't have to mess around with re-titling the property)? Additionally, does the note need to be non-recourse (no personal guarantee) for the note to not show up on our individual credit reports?

We have reached out to several lenders and are having a hard time getting clarity on this.

@Kris Wong I have talked at length about how to do this in previous posts. Rather then pull up previous posts, let me walk through the details here.

Fannie Mae has a 10 financed property rule, yes that is true, however if you know the way to structure things, you can be in a position to get as many Fannie Mae loans as you may ever want to have. First you must understand Fannie Mae's view on LLC's. Fannie Mae view's any financing of a property in an LLC that you own 25% or more of, as a financed property and it counts in their 10 financed property rule. It doesn't matter if its a non-recourse loan or not? It counts.

However if you open a SUB S or a C Corp. and move some properties over to that entity and then go get commercial or portfolio financing (available through any local community bank or credit union) even if you have to personally guarantee the loan, it doesn't count in the 10 financed property rule., because the loan is in the name of the corporation and its commercial. Pretty cool huh!!!

So what you want to do is hold your properties in your personal name to get Fannie Mae financing on them. As you get close to 10 or are at 10 financed properties, then move 1 or more over to the SUB S  and get commercial / portfolio financing and that thereby opens up 1 or more slots for Fannie Mae financing on your new purchases coming up. You can continue this pattern to financing hundreds of properties or as many as you could ever want. 

Why does everyone want to hold properties in LLC's, well most do it as a level of separation and protection of the personal assets. I agree, protection is critical, but I argue that a well crafted landlord policy with the highest amount of liability coverage, followed up by an appropriately sized umbrella policy is just as good in some cases better protection. I used to be an insurance agent for the major carriers.

The liability policy can and will pay out to the max. liability limits, but it will also pay 100% of all defense costs which no LLC on its own will do. Any competent attorney that is dead set on getting to your personal assets can pierce the vail of the LLC and get to your personal assets. They know how to set up the LLC's, they also know how to unwind one as well. Just mix personal assets and LLC assets even 1 time, and your now vulnerable to having the LLC vail pierced. Besides, you want to have access to the best financing, well that requires you to get Fannie Mae financing in most cases.

My game plan for all that will buy and hold to 10 or more properties is for the hold them personally and then open a SUB S and transfer the properties that make the most sense to transfer (age out the longest financed properties or the properties with the smallest balances) to the Sub S, get comercial / portfolio financing and use the Fannie Mae products to purchase and hold as long as you can. 

Here are the actual guidelines below:

See below from the reference guide for FNMA multiple financed properties. If they own 25% or more of the LLC or partnership then it would count.

Type of Property Ownership to include in Financed Property Count:

 Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property).

Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation; however, the financing is in the name of the borrower.

 Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

 Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the obligor on the mortgage.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower.

 Ownership of a manufactured home and the land on which it is situated that is titled as real property

Type of Property Ownership NOT to include in Financed Property Count:

 Ownership of commercial real estate.

 Ownership of a multifamily property consisting of more than four dwelling units.

Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation.

 Ownership in a timeshare.

 Ownership of a vacant (residential) lot.

Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership.

 Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

@Kevin R. thank you for your very descriptive answer!

Finance companies have no 10 unit limitation and are not an FNMA lender and make loans to LLC's --

So you can get all kinds of Stated income or full doc loans from lenders that portfolio loans and do not sell to FNMA....

Some Federal credit unions fit this bill too...as do some Savings and Loans....they portfolio the loan....so no FNMA limits.... 

There are a bunch of lenders doing Portfolio loans where you can combine your existing loans into one ......

They want them in LLC name.

Could be recourse 

or

no recourse...to the LLC principles

Some banks will do them --  underwriting is tough and personal taxes get reviewed

Commercial lenders will go Stated income --and underwrite based on the DSCR ..meaning if the rents cover the payment they will lend to the LLC and NO TAXES AND NO 4506t needed.

  • A portfolio loan could be from a bank or a hard money loan or a hedge fund...and this is many properties (portfolio) all wrapped in one loan ...so they are cross-collateralized.

Banks loan to US residents and are now required to get a 4506(t) from the IRS on loans they close...if they are Federally insured and regulated. 

So the Hedge funds and Finance companies have come in and do what the banks cannot. They are not as cheap as the banks but will still do 30 year fixed loans @ about  6% whereas banks are under 5% for the same loan. A bank will not make a commercial loan for longer than 10 years...so you will get a 30-year loan with a 10-year adjustment or call. (This way they place the interest rate risk on you) 

I have posted on those before so read my posts...............

This topic contains the "secret sauce" that makes the entire buy-and-hold recipe work.  

@Kris Wong apologize in advance of slightly hijacking this post.

I was reading it and wanted to ask you a question: I’ve been analyzing my first deal and at my exit strategy point. I want to do the same thing you mention - buy with hard money, rehab, place tenants, refi. What has been your refi strategy?  Without having >2 years of rental income to count, what options do I have?

Most commercial lenders and banks --who finance residential NON-owners will want 6-month seasoning to use the new appraised value so allowing a 75% LTV refinance cashback to recover your acquisition costs...and even some rehab expenses if the final value is quite improved over your initial purchase price...otherwise they hold you ot75% of what you paid and so you do not recover your costs

Since you do not have 2 years taxes to support the loan --  you may need a STATED INCOME COMMERCIAL LOAN -- Hedge funds and finance companies provide those using only the Credit report of the LLC principle and new rental agreement and an appraisal to support the loan

Full Doc = If banks can use your taxes figure high 4.75% - 5.5% --- 30 year am -- 5 year or 7 year adjust 

Stated = if only to the new LLC with no taxes then Stated is going to price at 5.5% -7% for a 30-year loan with either a 7 or 10-year adjustment depending on LTV and Score

Note regarding the LLC with a 91- tax ID number won't show up on a credit report regardless of whether its recourse or non-recourse...we just refinanced a dozen homes held by undocumented folk who got 91- ITN numbers and financed homes that way --- none of the underlying loans with multiple lenders reported to their SOCIAL SECURITY NUMBERS

FYI = The stated commercial lenders --(70% of them do not report to bureaus ANYWAY)  ...

Anyhow....if you are new acquire them with Stated loans and 2 years later wrap them all into a bank portfolio loan once the portfolio is complete and stabilized....meanwhile, you can B-R-R-R-R multiple deals.

@Jared Sanderson if you have strong W2 income, not having 2 years of rental history shouldn't be a problem, as far as I know. If you don't have strong W2 income, I am not sure what your options are. I have strong W2 income (and more than 2 years of RE experience), so once we've completed our renovation and met our 6 month seasoning, it's a simple matter to refi w/ a conventional loan at 75% LTV.

All that is good...

Strong w2 income etc....Strong credit 

However, it needs to be a commercial loan since your traditional FNMA lenders

( 1) won't accept more than 10 financed properties and

(2) will not loan to an LLC.....period

So a commercial loan is your only choice for an LLC....

Your only decisions are ...

Do you go Stated or  Full doc.... with a 1.5% yield difference...?

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To free up my borrow-ability, I just paid off some or sold my least favorite properties into the froth.

My wife will buy OR I will buy to double our limit.  Do you have a souse (that you trust:) that has fewer loans and could be the 'partner'?

Every time I refi it costs me at least $3800 and a bunch of pain and messing around. Some the commercial appraisal alone would be $3500 with total costs closer to $8-10,000.

With paid off rentals, I can quickly save DPs or enough cash for my next purchase outright without the expense or hassles of messing around with lenders.

Is selling a dog or just paying any off an option for you @Kris Wong

Okay, I need to clear up some mis-conceptions here. 

1st of all, if a person wanted to do a rate and term refinance using a conventional loan (Fannie Mae / Freddie Mac), meaning they are paying off the existing liens on the property plus rolling closing costs into the loan, there is no time frame requirement as far as being on title. They can do that and close the loan 1 day after closing on the purchase up to 75% of the appraised value. 

However, if they want cash out, they must be on title for 6 months or more and they will be limited to 75% cash out on a non-owner occupied loan or 80% on an owner occupied loan. 

As far as @Jared Sanderson question of being able to use rents when you haven't had rental income on tax returns for 2 years. Fannie Mae and Freddie Mac do not require you to have ever had any rental income in the past to now count rental income as part of your loan request. You can count existing rents of the unit you are buying or even a newly signed lease agreement. If its a newly signed lease agreement, you may have to prove that you have received the 1st months payment and deposits, but if you have, you can count the income to help offset any expense the mortgage PITI would have.

The way that the conventional lenders calculate rental income is as follows: Monthly Rents X 75% Minus PITI. If the number is a positive number, then it adds to your income, if the number is a negative number, then it adds to your debt. You can actually decrease your debt ratio by buying a rental property assuming it gets enough in rents that after the 25% vacancy factor and subtracting the PITI, you have a positive number. That actually lowers your debt ratio.

Bar none, the best rates and terms as far as financing a rental property are always going to be with conventional financing (Fannie Mae / Freddie Mac). 

I have several lender buddies that can do the Non-QM lending to entities such as an LLC or Sub S. but why would you go that route unless it was your 10th financed property or more and you were refinancing it out of a conventional to a Non-QM mortgage in a SUB S just so you can open up more slots available to finance additional Fannie Mae loans on new purchases?

Furthermore, why in th world would anybody ever hold a property in an LLC? There is absolutely no value in doing that, that cant also be done in a different way with better protection? Most people hold properties in an LLC as a way of separating and protecting the personal assets from a law suit that may arise out the ownership of the rental properties. I say the better way is to hold the properties in your personal name, get the highest level of liability coverage on the landlord policy as you can get. Follow that up with an appropriately sized umbrella policy for 1-6 million in coverage. The policies will potentially pay out up to the liability limits and the policies also cover 100% of all defense costs. Do you think an insurance company wants to pay millions in additional defense costs? No they don't unless they can win and it will cause them to pay less or not pay at all. Otherwise they will settle. If they settle, that's good for your because the liability is now gone and your insurance company paid the whole bill.

You don't want to hold properties in an LLC because even if you get commercial financing on them, they will still count in Fannie Mae's 10 financed property rule if you own more then 25% of the LLC. The better way is to only hold the properties beyond the 10 Fannie Mae financed properties in a Sub S corp and get commercial / portfolio financing on them in the name of the corporation. Even if you have to sign on them as a personal guarantor, they wont count into Fannie Mae's 10 financed property rule. Thereby allowing you to still get up to 10 financed properties. You can keep moving the properties from Fannie to the commercial and always open up additional slots for new purchases using Fannie Mae loans.

You did all this and not once was an LLC used. You need to get together with a lender that knows the investor world inside and out and can give you solid advice of the proper way to structure things to your advantage.

Just my 2 cent!!! 

Updated 9 months ago

Oops, my bad, the max rate and term refinance with no seasoning is up to 95% not 75% as I stated above.

Holy cow I was having a bad night last night. 

The "Oops, my bad, the max rate and term refinance with no seasoning is up to 95% not 75% as I stated above." was meant for a different post on a different thread. Sorry about posting the erroneous info. on this thread.  

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