To LLC or not to benefit from better mortgage terms

5 Replies

As many of you are aware, if you own a building in your own name, 1-4 units, you can often get great "FNMA type" financing where you get a decent interest rate, lower DP, and literally locked in with no rate changes for 30 years. I've never been able to get these because our buildings are owned by our LLC.

We own 8 buildings, are semi high net worth so we have alot to lose. I want to be careful. that being said...

Have any of you encountered this and made the decision to take a building out of your LLC to qualify for this better financing? I'm tempted but my lawyer says no, but he makes it clear that's his job, to protect me. He's gone so far as to say he might do it himself if he were in my situation. The issue of course is that you don't have the protection of the LLC if something goes wrong with that particular building. And we do NOT do our own work so this protection is actually relevant. Just not sure, love to hear any thoughts, any ramblings even!

Thank you all!

Hi Kenny - I think about this a lot and have decided it's worth it to take the 30-year fixed.  I hedge with higher liability coverage and feel that as long as your coverage is equal to or greater than your net worth, you're probably going to be okay.  You can also go a step further with a commercial umbrella policy if your net worth calls for it.

I tend to be more worried that rates will spike, sending cap rates much higher and valuations much lower.  I perceive the future inability to refinance commercial debt as a greater risk in terms of loosing my buildings.

Some people will probably just tell you to buy in your own name and transfer to the LLC; that they've never heard of a note being called. I just wonder if that will change if rates go higher, giving banks an incentive to look for low interest notes to rein in. Not sure if that's how it would play out if rates go higher, but it seems to make sense that it could.

Finally, I think an investor's strategy will probably differ depending on where they are in their investing career. Early on, as we are, you're really trying to maximize cash flow and build a portfolio. However, if you've owned your buildings for decades and have much more equity in them, you can probably still cash flow well with a commercial note and take advantage of the LLC protection. So a big part of this will depend on how levered you are.

@Kenneth LaVoie as mentioned above you can certainly take the property out of your name for 1 day, close your refinance, then switch it back to your LLC to get a Fannie/Freddie loan. A lot of people do this strategy. It might be $100 extra to file the deed change? Something like that. But you get a significantly different rate and term on a loan. Feel free to tag me if you have any specific questions about it.

Considering that the only group sued more than landlords is doctors, I'd say the benefits of asset protection far outweigh the savings you are looking at.  I'd think twice. 

@Kenneth LaVoie

Why not figure what your payments would be with the 30 yr financing and then work backwards to figure what your LTV would have to be with your current financing and then use that as a target point to pay down to and then refinance...

This way you keep your liability protection, get the same payments as the 30 yr financing and are better protected against a down turn of the market due to the larger equity cushion.

Example 100k note with 30 yr 4% = $477.42, but you could use a 20 yr note at 6% in the LLC and carry $66,638 mortgage to get that same payment $477.42. You would have to pay down $33,362 to do that, but you could just pay it down over time or just make a mental note of what point you need to refinance once it gets to that level.

Just an idea, it may take more time to get positioned for this method, but it will be the best of both worlds...  liability protection and lower payments.

You could also access the equity cushion in each property after doing this with a HELOC to use for private lending, note purchases, acquiring more deals ect.

Jeff V

In my in my case we actually have enough to pay off all of our mortgages. I'm only looking at this Fannie Mae type option to save money over the course of our holding period, now that we're anticipating owning them for life. But I did think of another option. I've got two of these 3/3 loans, currently 60k each with 10 years left. I can take out a cash out refi on my own residence and retire one or both. With my portfolio lender bank, they will let me slide with no appraisal and I'll be about to take out 40k additional, 4.375% 30 year, $500 total closing costs, bi-weekly, one point (I can do no points but the rate will be .5% basis points higher). I take out 20k of my own money plus the 40k and retire 1 of them and my cash flow increases $500 per month. Taking 20k out might be prudent because the stock market is in the top quintile historically (valuation wise). 

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