Operating an LLC - Can I Finance my Deal Personally?

11 Replies

Dear Lenders, 

I am looking to run my real estate business under an LLC, am I able to finance my 1st deal through my name, and supply the title, etc. through my LLC? This way I can utilize lower rates (aiming for the BRRRR strategy), while still being protected under an LLC and umbrella policy.

I will be financing my deals in the Lehigh Valley, PA area, so please let me know if this is a possibility? 

Otherwise, what are the best strategies for lowering your rates, increasing your term, etc. under an LLC--coming from someone looking to dive-in without much liquidity.

Also, I have heard that utilizing your first few properties without a legal entity and utilize umbrella insurance, then transfer them to an LLC (but I understand the taxation side isn't pleasant).

Thanks for your time, appreciate it.

@Kyle Lauriano lots going on here so I'll try to answer these one at a time:

1. Title under LLC - you can absolutley do this but do NOT expect a lower rate for doing this. In many cases your rate will be HIGHER. So if you can be on title at closing, then switch to the LLC after closing, then you would receive the SAME rate that an individual would get. If you are totally against that strategy then you would expect either a higher rate or something like a 15 or 20 year mortgage which will make your payment higher. The best terms and conditions are for loans where you are on title.

2. Transferring title - this will be dependent on your state.  For example, Texas has no "taxes" you pay when you change the title.  Florida has a tax based on the amount of the loan.  So each state will be a little different with this.  Please ask this specific transferring title question in the PA forum.  See if any locals can give you some advice on if there is a tax for transferring title.

3. Insurance vs. LLC - there are lots of different strategies of liability protection. Land Trusts are another option. Which one is right for you? That may be hard to say but keep gathering information so you can make a good, informed decision on it.

Hope this helps!

Originally posted by @Andrew Postell :

@Kyle Lauriano lots going on here so I'll try to answer these one at a time:

1. Title under LLC - you can absolutley do this but do NOT expect a lower rate for doing this. In many cases your rate will be HIGHER. So if you can be on title at closing, then switch to the LLC after closing, then you would receive the SAME rate that an individual would get. If you are totally against that strategy then you would expect either a higher rate or something like a 15 or 20 year mortgage which will make your payment higher. The best terms and conditions are for loans where you are on title.

Thanks for all this information @Andrew, diving deeper on your statement, in regards to being on the title at closing and switching over to an LLC after, would this have any consequences or complications? Would you mind helping me understand this concept?

Thanks,

@Kyle Lauriano

When a lender records a mortgage, the mortgage is in the name of the property owner. So if the LLC owns the property, then the mortgage will name the LLC. The note/loan agreement will also name the LLC along with you in your individual capacity. The lender may want you as a guarantor or may want you as another borrower --- that's up to the lender.

If you are asking if you could get a Fannie/Freddie loan by buying it under your name AND THEN transfer it to an LLC, you'll trigger the due-on-sale clause. That's not a lender requirement --- it's a Fannie/Freddie requirement.

On a similar note, you shouldn't transfer properties in Pennsylvania between yourself and your LLC. You pay the full realty transfer taxes on it every time.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

I've asked before and maybe missed the answer... but doesn't this strip the LLC of it's asset protection?

When Courts Will Pierce the Corporate Veil

Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.

  • There is no real separation between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or LLC is really just a sham (the owners' alter ego) and that the owners are personally operating the business as if the corporation or LLC didn't exist. For instance, if the owner pays personal bills from the business checking account or ignores the legal formalities that a corporation or LLC must follow (for example, by making important corporate or LLC decisions without recording them in minutes of a meeting), a court could decide that the owner isn't entitled to the limited liability that the corporate business structure would ordinarily provide.
  • The company's actions were wrongful or fraudulent. If the owner(s) recklessly borrowed and lost money, made business deals knowing the business couldn't pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn't apply.

https://www.nolo.com/legal-encyclopedia/personal-liability-piercing-corporate-veil-33006.html

Do not count on asset protection much no matter what entity you use. You will get sued no matter what, it will cost you money whether you win or lose and your insurance company will step in to defend you if it happens on the property most of the time.

Eazy-peezy- close loan in your name, tx deed to your LLC asap after. It is done all the time.

Danny

@Matt K.

Piercing the corporate veil is complicated. From what I've seen, most courts don't look at a single factor to pierce the corporate veil --- it's the overall picture. 

I did read an article from a legal journal stating that the most dispositive factor in piercing the corporate veil is gross undercapitalization. I didn't go review all the caselaw but it would make sense.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Hi @Andrew Postell

The consequences being, since the Title would be transferred, from personal to LLC, would this leave the individual vulnerable when taken to court, thus exposing the investor and thereby not being adequately protected by the LLC structure?

Thanks,  

@Kyle Lauriano it looks like some of the posts above speak about the liability part to this. I mentioned it briefly so I'll just defer here since I am not an attorney. As I mentioned there are lots of strategies and you have to follow a lot of steps for some to work - not co-mingling funds, keeping accurate accounting records, etc. Nothing is fool proof I guess but if you believe that keeping the LLC on the deed at all times is the right strategy for you then just expect a higher interest rate or adjustable rate, shorter term, etc.