Refinance as an LLC?

9 Replies

Purchasing property for cash. Using private $$ loan for rehab. Will Refi after rehab and/or Seasoning. When going to apply for rehab will lenders allow refi in LLC name? Does refi have to be in personal name?

You will pay a significantly higher interest rate refinancing through an LLC.
Seasoning, from my knowledge, is 6 months.

You won't be able to get a conventional, 30 year fixed rate mortgage in an LLC. Fannie and Freddie only buy loans made to individuals, not entities. So, yes, you can get a loan with an LLC, but it will be a commercial loan. You should expect a shorter fixed period, ARM or balloon payment.

@Paul LaSpina thanks for this post.  I have 2 suggestions here:

  1. Buying a property with cash and then refinancing can get SUPER confusing really quickly.  Fannie/Freddie loans have the best rates but also the most rules to them as well.  I wrote an article on this subject and how to properly buy a property with cash HERE
  2. There are several methods of placing a property in an LLC. You can close in your personal name with a Fannie/Freddie loan and then change title after closing. This is generally the most popular method. So, close in your name, then switch title. You receive the best loan you can find with this strategy. You can also find a loan type that will allow you to close in your LLC. This loan type will have a higher rate, an adjustable rate, and might be a 20 year loan...and sometimes its all three.

Lots to know about so feel free to tag me and ask questions if you need.  Thanks!

@Andrew Postell That's great Info, Thanks !!! Your second suggestion seems like the solution I was looking for, Rifi personally then change title to LLC.

Do you work with Fannie/Freddie loans? Could I come to you when ready to Rifi? Do you provide rehab loans?

Would love to discuss

Paul

@Paul LaSpina glad this helps.  And thanks for even asking about this but I only write loans in Texas.  Sorry.  Maybe try looking for some good recommendations in the New York forum.  The local forums usually have some good suggestions in them.  Thanks!

@Andrew Postell    Awesome ! Thanks again, hope you don't mind if I try to pick your mind from time to time?

@Paul LaSpina

I read the advice given in this forum and I feel compelled to comment. Purchasing a property in your personal name with a Fannie/Freddie loan and then changing title after closing without refinancing into a commercial loan is NOT a good idea and will not further your goals of liability protection at the least possible cost (I am inferring that those are your goals from the question). First, most, if not all lenders, who issue Fannie/Freddie loans will have a "due on sale" or "due on transfer" clause in the note. This means that if a property is transferred to someone else, including an LLC in which you are the sole member, it will be considered a default and will trigger the payment of the entire remaining balance of the loan, usually within a very short period of time (think 30 to 90 days).

Some people say, "well, the bank will never know that I transferred it. As long as I make my monthly payments, they won't care and will turn a blind eye to it even if they find out." This may be true. I have seen this happen. Some banks do not care and I know people who have done this and have continued to carry the Fannie/Freddie loan even after their LLC became the title owner.

However, there is still another problem here. Namely, the purpose of having an LLC -- liability protection -- is severely undermined by the fact that there is financing on the property in the individual member's name. Most people drastically misunderstand what an LLC actually is and how it provides protection. Just because a property is owned in an LLC does not mean that you are protected from all liability no matter what other circumstances exist. Specifically, there is a concept in the law (this definitely applies in New York) called "piercing the corporate veil." Without getting too deep into legalese, it means that a plaintiff can get around the protections of the LLC and get at the assets of the LLC's individual members by showing that the LLC and the members are really one in the same; that there is no actual distinction between the entity and the individual.

One of the ways that a plaintiff can do this is by showing that there is co-mingling of funds and obligations between the LLC and the member. This would include taking money from the LLC without following proper formalities, such as creating documentation that the withdrawals were distributions of profit; collecting rent and putting it into the individual member's bank account as opposed to the LLC's bank account; making personal purchases with the LLC's debit card; and -- you guessed it -- having financing in your personal name tied to the property which you hold in your LLC. Armed with these facts, the plaintiff can keep you and all of your assets in the lawsuit and potentially make you not only sell the subject property, but may also force to sell other properties, or hand over the money in your personal bank accounts, garnish your wages, etc.

So, the long and short of it is, if you decide to go with option 2, just know that you are likely undermining the very purpose for having your LLC be the title owner in the first place. As anything in the legal world, there are no absolutes. It is possible that you could convince a judge that the fact that you have financing in your own name on the building does not mean that your LLC was a sham or that there is no separation (especially, if you followed all the other corporate formalities and otherwise kept your funds separate from those of the LLC), but I think your chances of being able to keep your personal assets out of a lawsuit will be greatly diminished in such a case.

Personally, I would go with the commercial financing as the terms are not that much worse than Fannie/Freddie financing, at least in upstate New York.  That is, unless, you don't mind owning the asset in your personal name and just making sure you have rock solid insurance to fall back on, in the unlikely even that you are involved in a catastrophic lawsuit at some point during your ownership of the asset.  

Very well put by @Vitaliy Volpov . Posts like that are why I love the biggerpockets forums, so much great content to read through!

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