Any ways to get around banks not giving loans into LLC's?
Rental Property Investor · Chicago, IL · Member since 2018 · 20 posts · 11 votes
@Ryan Hotza thanks for posting this. This is a very common question and has some different "legs" in the answer so I'll do my best to help break this down some:
Questions for Lenders
Most banks will not loan so you have 2 options. 1) just get it in your name and assume a little risk or 2) get a commercial loan into the LLC. There are multiple lenders that can assist, there rates may not be favorable but it's a option
@Ryan Hotza thanks for posting this. This is a very common question and has some different "legs" in the answer so I'll do my best to help break this down some:
Questions for Lenders
@Philip McCleary @Andrew Postell
Yes thank you so much for the great advice, i am a little hesitant about getting a commercial loan as that may really reduce the cash flow. So my reason for concern about the property is because its a college student rental and i would hate to have some accident occur on the property and i am responsible for it. Regarding the transfer of deed after the purchase, i was under the impression that i would run into problems with insurance provider damanding the name on the deed would need to match name on file, or something of that matter.
If I was you, I would consider an umbrella insurance policy to cover perceived additional risk. We have commercial 1-4 unit loans, but are about a point higher in rate than a Fannie Mae loan. Let me know if I can help.
Mark
If I was you, I would consider an umbrella insurance policy to cover perceived additional risk. We have commercial 1-4 unit loans, but are about a point higher in rate than a Fannie Mae loan. Let me know if I can help.
Mark
Yes Mark i may have to look into that. Im going to see exactly what kind of rates a commercial loan will be, then explore options from there. Thank you. Is it possible to refi a commercial loan after a year or so?
@Ryan Hotza Keep in mind too, run your rental property as a business and address any issues quickly, and you shouldn't have any issues with people suing you. For example, in my state when purchasing a property the fire marshal will inspect and make recommendations: hard wired smoke detectors, fire rated doors, etc.
The insurance company will inspect it and also make recommendations: railings by the stairs have to be fixed, etc.
Address all of those issues promptly, and you have a great paper trail to say you're running the business properly.
I've owned multiple rentals for 15 years now, had prob 200+ tenants, and not one single lawsuit. I also carry a $2M umbrella insurance policy too ($500/yr), no LLC, and no issues.
@Ryan Hotza
Just like @Tom S. I just have a umbrella insurance policy in place. 35 years without a lawsuit.
Be careful when buying umbrella policies. Some will have language that excludes any “business activities” from being covered. I have a $1million USAA umbrella policy I bought last year (before I even got into real estate investing) just to protect my net worth in case of any lawsuit from daily life. It’s only $224/year. You never know when you might be involved in a bad car accident that might have a lawsuit that goes beyond your routine auto coverage. I noticed a paragraph in the policy that explicitly stated the policy did not cover any ‘business” lawsuits. So, be sure any umbrella policy you buy explicity does cover business activities such as real estate investments.
Be careful when buying umbrella policies. Some will have language that excludes any “business activities” from being covered. I have a $1million USAA umbrella policy I bought last year (before I even got into real estate investing) just to protect my net worth in case of any lawsuit from daily life. It’s only $224/year. You never know when you might be involved in a bad car accident that might have a lawsuit that goes beyond your routine auto coverage. I noticed a paragraph in the policy that explicitly stated the policy did not cover any ‘business” lawsuits. So, be sure any umbrella policy you buy explicity does cover business activities such as real estate investments.
Exactly, you have to add each property to the policy and it has to cover your business activities. I use State Farm for business. I cover my personal net worth through USAA with a 2 million dollar umbrella policy.
You can also look into this article that explains how using a Land Trust can avoid the same flags with banks. You would essentially purchase the property in your own name, transfer it into the Land Trust and the place the trust into the LLC. This offers you all the financing options that are available to you in your own name, while still offering yourself the protection of the LLC after the purchase is complete. Another benefit of this is that you can establish the Land Trust with an attorney so that you can keep your personal name off the public record, creating some anonymity from prying eyes.
There are many people who rely on insurance, which is definitely the first step I would recommend anyone take in real estate investing. But insurance only covers one type of liability: accidents. I cut my teeth litigating insurance companies for not paying out big claims after law school, many of those cases were caused by miscommunication and not through intentional wrongdoing. As my personal portfolio has grown over the years, I have introduced additional levels of protection to protect it - I think it is an unnecessary risk to trust all my eggs in one basket.
This is just my personal opinion and not intended to be legal advice. Each person approaches investing differently, and I wish you all the best of luck. I just encourage the investors I meet to do their due diligence.
I have had the advice to buy properties through an LLC in the past on many occasions. If the deed has the LLC and yet the loan is in my personal name, am I not voiding any benefit to utilising a LLC? What other benefits to an LLC are there outside of business liability? I was not aware that banks will not lend to LLC but now that I think about it, I can understand why.
I have had the advice to buy properties through an LLC in the past on many occasions. If the deed has the LLC and yet the loan is in my personal name, am I not voiding any benefit to utilising a LLC? What other benefits to an LLC are there outside of business liability? I was not aware that banks will not lend to LLC but now that I think about it, I can understand why.
You are not voiding benefits by the mortgage being in a different name than the LLC that is on title. We actually recommend getting loans in your personal name because the interest rate is much better. An LLC provides a layer of separation between you and liability for anything that could arise related to the assets or dealings of your LLC. For example, if someone is injured on a rental property that you own, the lawsuit could only come after the assets of your LLC (the rental property). The claimant would not be able to come after you personally or your personal assets. Additionally business debts would remain with the LLC and could not be attached to you personally. LLCs also have tax advantages, depending on how you file them.
The Land Trust would make the LLC the beneficiary, so it will still pass through in much the same way. I often work with clients and their CPAs through the process so everyone is on the same page. Operating agreements are quite specific to specific deals and properties, so I encourage people to approach an attorney to create operating agreements, or at least the first one or two. I actually don't have any good articles on this topic, at the moment, but since you bring it to my attention I will add that content to my list of articles I would like to write.