Rental Property Investor · Ft. Lauderdale, FL · Member since 2012 · 43 posts · 2 votes
Hi BP,
I currently have 4 rental properties with mortgages under my name. I am looking for my next property, but would like to finance it under the name of my LLC. All my LLC has is a credit card. I only have 1 year of tax returns for my LLC, but have over 5 years of personal tax returns with my 4 rentals. So I have rental experience.
I have a regular W-2 job with good income, good credit and no debt besides mortgages.
What is the best way to establish credit for my LLC to make financing easier? As I stated, my LLC has one credit card. How hard is it to obtain reasonable financing terms for a property under my LLC? Do i need another year of tax return? Are terms worse with an LLC than personal investments?
What are the pro's and cons of LLC financing vs personal?
I have heard about small banks offering loans to LLC's, but I want to educate my self first before reaching out to a bank.
Any information would be greatly appreciated. I really need some guidance.
I was in your exact shoes several months ago, and have done a fair amount of research on this topic. For reference, I created an LLC to hold my first investment property, and am planning to do a cash-out refi before May is up for this particular unit.
To answer your question, the easiest way to do it (or at least the way I am doing it) is to take out the loan in the name of the LLC, but attach what's called a "personal guarantee." That means that the bank can still hold you personally liable in the event of default, and will consider your personal income/assets when underwriting the loan. All that being said, you won't be able to do this at a big bank because the amount you'll be borrowing (in the eyes of their commercial department) is insignificant. As such, I'd recommend visiting several local banks and speaking with portfolio managers on the commercial side. Be honest and tell them about your experience, and ask insightful questions surrounding the products they offer. If you have good credentials and can speak intelligently on the matter, they'll be willing to work with you and make the loan.
Pros and Cons of Commercial vs Personal financing? Pro's would be you get to start establishing credit for the LLC, and you get to establish a relationship with a local bank which will certainly help funding future deals for your business. You also get the liability protection that comes with an LLC, in the event your tenant tries to sue you personally.
The cons are simply that the terms are never as favorable when compared to personal financing. You'll never find a 30-year fixed product, and the interest rates will always be higher. A typical commercial loan will probably run you ~1-2% above prime, with a balloon repayment (likely no greater than 10 years), amortized at 20 or 25 years. At the end of the day, I still think it's worth it to go commercial via an LLC to protect yourself in the event of a tenant lawsuit. Umbrella insurance unfortunately isn't all it's cracked up to be.
I was in your exact shoes several months ago, and have done a fair amount of research on this topic. For reference, I created an LLC to hold my first investment property, and am planning to do a cash-out refi before May is up for this particular unit.
To answer your question, the easiest way to do it (or at least the way I am doing it) is to take out the loan in the name of the LLC, but attach what's called a "personal guarantee." That means that the bank can still hold you personally liable in the event of default, and will consider your personal income/assets when underwriting the loan. All that being said, you won't be able to do this at a big bank because the amount you'll be borrowing (in the eyes of their commercial department) is insignificant. As such, I'd recommend visiting several local banks and speaking with portfolio managers on the commercial side. Be honest and tell them about your experience, and ask insightful questions surrounding the products they offer. If you have good credentials and can speak intelligently on the matter, they'll be willing to work with you and make the loan.
Pros and Cons of Commercial vs Personal financing? Pro's would be you get to start establishing credit for the LLC, and you get to establish a relationship with a local bank which will certainly help funding future deals for your business. You also get the liability protection that comes with an LLC, in the event your tenant tries to sue you personally.
The cons are simply that the terms are never as favorable when compared to personal financing. You'll never find a 30-year fixed product, and the interest rates will always be higher. A typical commercial loan will probably run you ~1-2% above prime, with a balloon repayment (likely no greater than 10 years), amortized at 20 or 25 years. At the end of the day, I still think it's worth it to go commercial via an LLC to protect yourself in the event of a tenant lawsuit. Umbrella insurance unfortunately isn't all it's cracked up to be.
Great stuff. I am searching for local lenders but will collect more information first. I want to be armed and ready to have an intelligent conversation with the lender.
You're most welcome, @Jackie F. Best of luck and like @Ivory Hayes said, if you have further follow-up and need any additional insights as you're moving along, feel free to PM me too
I agree with most of what @Michael Garofalo said in his post. Personal Guarantee is the way to start building business credit for your LLC, your loans in the LLC will be on the commercial side of the bank and the products will never be as favorable as personal financing.
However, You can find a 30 yr fixed commercial product, thought it probably wouldn't be through a bank. I have ran across a few loan products that are 30 yr commercial for LLC's.... never say never.
Your relationship with the bank and your track record go far in this business. Portfolio banks have less strict terms and those terms can be stretched every now and then. IF/When that happens depends on your relationship and track record.
Also you will want to get yourself a DUNS number this is what all of your business credit will be attached to. Unless you apply for one and build the credit there you will always have to provide a personal guarantee. DUNS reports to PAYDEX as well which helps to build your ability to get vendor credit. DUNS and PAYDEX are the business credit services for Commercial Business Credit.
Personal credit runs through TransUnion, Experion and Equifax... all of which have nothing to do with business credit.
In DUNS there is a section to upload your business financial statement periodically... you basically provide much of the information in your business credit report as well as banks will report commercial lines/loans there as well.
If your intentions for this post was to get your business credit built quickly... DUNS has a Credit Builder product where they will do much of this data entry for you and advise you on what you need to do to RAPIDLY build your business credit as quick as possible. You could pay for this service to grease the wheels and get the ball rolling.
@Jeff V. This is mind blowing. I was not aware of the different credit reporting bureaus for LLCs. I will look into DUNS. I assume there are additional fees for that.
Funny thing is that I got a letter from them this week and I tossed it as a marketing thing. I will read up on them.
The only fees that I have ran across so far are for their Credit Builder Product. They also provide monthly updates to when your business credit improves or declines. It's very similar to a credit monitoring service on the personal side.