Be your own hard money lender through your own LLC?

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Be your own hard money lender through your own LLC?

Andrew Neal
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes

So a few months back on a different thread @jorge ruiz brought up this idea and I was curious if anyone has does this or if it's possible.

You create an LLC. You buy a home. Your LLC gives you a loan for the home. You file the deed for that loan at the county courthouse. You use the money from the LLC to buy and fix up the property. Once the property is completed, your conventional lender comes to refinance the loan. Your conventional lender runs title and sees there is a loan. Your conventional lender refinances you into a new loan, and cuts a check to your LLC in the amount of 75% of the value. Please don't confuse this 75% with a "cash out" amount. The non-cash out LTV on a refinance is also 75%. We are refinancing a mortgage. Your LLC's mortgage. Essentially your LLC has become the bank/hard money lender/etc. However you want to think about it. You get to set the interest rate (it can be 0%) and you get your investment amount back sooner.

One thing that makes me think this may not work is the fact that you own the LLC and also are purchasing the property? Maybe @Chris Mason has some knowledge to drop. 

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Mark Fries:
@Michael Garofalo @andrew neal

The IRS has absolutely no say in what percentage interest can be charged in a situation like this, or most to be honest.

I have not done this with homes but I have made similar loans between companies that I own and vehicle purchases and it's worked out fantastic... I assume it would work similar for homes.

Mark the IRS does have an imputed interest rate if you do a private note with less than a certain rate..  I have sold many many of my OREO's with zero interest loans.. and we always get tagged with imputed interest.. now to be fair I get a premium on pricing when I sell with zero interest and my notes are Rock solid never had a default.. which is my main goal.

although the lender on the refi will see the LLC is a single member and on his tax returns .. so its not like your hiding anything. Anyway a check with a good MLO who does commercial lending would be an appropriate person to run this by.

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  • Roman M.
    Investor · Miami Beach, FL · Member since 2016 · 486 posts · 216 votes
    7y

    so what is the advantage of this? 

    Saving 1/2 point on refi ?

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  • Michael Garofalo
    Rental Property Investor · Washington, DC · Member since 2018 · 198 posts · 169 votes
    7y

    I wouldn't do this. It brings into question the co-mingling of personal vs business funds, and therefore could compromise the asset-protection afforded by an LLC. On top of that, I'm almost certain the IRS would not allow you to charge a 0% interest rate.

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  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y
    @Michael Garofalo @andrew neal The IRS has absolutely no say in what percentage interest can be charged in a situation like this, or most to be honest. I have not done this with homes but I have made similar loans between companies that I own and vehicle purchases and it's worked out fantastic... I assume it would work similar for homes.
    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Mark Fries:
    @Michael Garofalo @andrew neal

    The IRS has absolutely no say in what percentage interest can be charged in a situation like this, or most to be honest.

    I have not done this with homes but I have made similar loans between companies that I own and vehicle purchases and it's worked out fantastic... I assume it would work similar for homes.

    Mark the IRS does have an imputed interest rate if you do a private note with less than a certain rate..  I have sold many many of my OREO's with zero interest loans.. and we always get tagged with imputed interest.. now to be fair I get a premium on pricing when I sell with zero interest and my notes are Rock solid never had a default.. which is my main goal.

    although the lender on the refi will see the LLC is a single member and on his tax returns .. so its not like your hiding anything. Anyway a check with a good MLO who does commercial lending would be an appropriate person to run this by.

    Podcast Guest on Show #222
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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Andrew Neal you can find the original posting I wrote on this subject HERE and this is something that many people practice all the time.  I say "many"...I mean there aren't "many" people who have that much cash just laying around to buy and rehab a property but if you do, that is the right strategy to use.

    @Roman M. while the interest rate is a little lower when you refinance the true advantage is not falling into those "Delayed Financing" traps.  Delayed Financing (which is referenced in the article) has a lot of limitations to it.  But if you file a lien, you don't have any of those rules apply.

    @Michael Garofalo and we are NOT co-mingling. In fact, this strategy helps REINFORCE to NOT co-mingle. Filing a lien shows a paperwork trail of funds and where they came from. If you buy with cash...that creates a gap. When you buy a property with cash your borrowing money from yourself already. This strategy shows the necessary documentation to help keep a separation in place. Your company lent it to you. You now have that documentation to prove it. Most people DO NOT provide those steps in writing. This creates it. Also, I have spoken with the IRS about this AT LENGTH. I mean, for a looong time. They do not have any issues with a LLC lending to a person with a 0% rate. But they would have an issue of an S-Corp or C-Corp lending to another S-Corp or C-Corp with a 0% rate. Those entities are required to lend at fair market rates and be taxed appropriately for the earnings from such a loan. So if you buy in your C-Corp name, and borrower from another C-Corp...just be aware of that rule. But if you are "borrowing" from your LLC, no such rule exists. @Mark Fries I tagged you in just in case.

    I certainly hope this helps but feel free to tag me with any other questions.  Thanks!

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  • Andrew Neal
    OP
    Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
    7y

    Wow, some great information here. @Andrew Postell thanks for the response and I will dig into your thread. This certainly presents an interesting opportunity since I know delayed financing can have some hoops to jump through.

    @Mark Fries interesting that you have also used this in purchasing vehicles.

    1Reply
  • Andrew Neal
    OP
    Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
    7y

    Everyone should just go to @Andrew Postell's original post from about a year ago since I just read through it and answered all my own questions.

    1Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y
    @Andrew Neal It works great for automobiles for my work.... And also the opposite when I sell a used work vehicle I sell it usually to a worker or subcontractor and I hold the note and he/she pays me kind of like private buy here pay here As long as I don't break the regulations for the DMV about how many vehicles can be sold per year I'm OK
    1Reply
  • Mark Fries
    Contractor · Jacksonville, FL · Member since 2017 · 1k+ posts · 2k+ votes
    7y
    @Jay Hinrichs Good catch you are correct but I guess the premise of what I was trying to say was it's definitely possible and legal and people do it all the time.
    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Mark Fries:
    @Jay Hinrichs

    Good catch you are correct but I guess the premise of what I was trying to say was it's definitely possible and legal and people do it all the time.

     Absolutely .. carrying paper is a great way to move assets from non performing or under to steady consistent income stream with no tenant drama.  

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  • Kevin Brenner
    Rental Property Investor · Washington, DC · Member since 2018 · 64 posts · 21 votes
    7y
    @Andrew Neal this is an interesting idea. I recently took out a line of credit on my stock portfolio to pay for an MFH rehab. The money is floating at prime (cheaper than any hard money lender even if rates are hiked) and on a 5 yr balloon - more than enough time to refi out and repay the debt in full. Plus the money is 100% recycleable. Once I transfer this property to an LLC I plan on using my entity to secure the line of credit for future projects. Point is I can use this strategy to avoid paying HML fees. Although it only works if you have money to collateralize in an investment portfolio. Maybe this could work for you?
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  • Nikki Closser
    Investor · MI · Member since 2019 · 112 posts · 221 votes
    6y
    Originally posted by @Andrew Postell:

    I have spoken with the IRS about this AT LENGTH. I mean, for a looong time. They do not have any issues with a LLC lending to a person with a 0% rate. But they would have an issue of an S-Corp or C-Corp lending to another S-Corp or C-Corp with a 0% rate. Those entities are required to lend at fair market rates and be taxed appropriately for the earnings from such a loan. So if you buy in your C-Corp name, and borrower from another C-Corp...just be aware of that rule. But if you are "borrowing" from your LLC, no such rule exists.

    @Andrew, what if my LLC is taxed as an S-Corp? Does that matter or am I still "borrowing" from my LLC? Thank you!!

    0Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    6y

    @Nikki Closser ah, so if your company is an S-Corp then the IRS does have some specific rules to S-Corp's lending money. They have VERY specific rules that if an S-Corp lends to another S-Corp or C-Corp that they MUST charge a market interest rate. I have spoken to the IRS about this strategy at length and I feel that even if your S-Corp is lending to YOU (and not another S-Corp) that the safest thing is to make sure you charge an interest rate when doing this. 3% would be completely fine for "market rate" right now. Keep in mind that charging an interest rate will require paperwork, like a 1098 for example, but if you want to use your existing company in this fashion then it is totally allowable for this strategy...just want to make sure you are also following property regulations as well. You could certainly create another LLC for a few hundred bucks if you like...in Texas we can just call the Secretary of State to do it. Meaning, you don't need an attorney to have an LLC for this purpose alone. Anyway, hope this helps!

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  • Nikki Closser
    Investor · MI · Member since 2019 · 112 posts · 221 votes
    6y

    @Andrew Postell yes, this helps a ton! I'll create a new LLC. Thank you!

    1Reply
  • Jerel Ehlert
    Attorney · Austin, TX · Member since 2014 · 890 posts · 759 votes
    6y
    Imputed interest rate rules: https://www.law.cornell.edu/us...
    Index of applicable federal rates: https://apps.irs.gov/app/pickl...
    0Reply
  • Joseph H.
    Kansas City, MO · Member since 2018 · 91 posts · 30 votes
    6y

    @Andrew Postell Has a great post on this. 

    1Reply
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