Forming an LLC and trouble with lending

7 Replies

So here is the scenario. We own 4 properties. The one we live in. I own 2 rental SF homes and my girlfriend owns 1 SF home that we rent. We are looking to form an LLC for any future rental properties. Together we make around $200,000/year and live in Greensboro NC. Wondering if we would have trouble getting financing for the LLC on future deals. The properties we own all have equity. About 30K in the one we live in, 25K in one, 15K in one, 50K in another. All generate positive cash flow and have very little trouble renting.

Any help is appreciated.

Very common question/situation

The root issue is that you will get the best mortgage rates using qualifying Fanny/Freddie loans. The mortgages won't lend to your LLC. Besides you and your girlfriend have a MUCH better income and debt/income ratio and credit score than your LLC anyway. So most folks buy properties in their own name and then move them to their LLCs.

But beware, mortgages have a "due on sale" clause in which states that if you sell the property (e.g. put it in an LLC) then the lender can demand immediate payment in full on mortgage. This is a very real legal issue. That said, I have NEVER met someone this has happened to. (Or even met someone who knew someone this had happened to.) One argument is that the mortgage company knows that if they did try to demand due on sale payment we could just move the house back into our names. :)

Thanks George.  I know moving the properties comes with the due on sale risk but di not knw you could just move it back.   So are you just transferring the deed?  Is it really just as simple as that?

@Louis Walthall - I have been in a very similar situation.  Like @George Pauley said, you will get better terms if you keep purchasing in your personal names.  

If you do want to purchase directly through the LLC you will be talking with the commercial lending side of the bank. You will be looking at 5 year term / 20 year amortization loans most likely and you will most likely still be needing to give a personal guarantee on the loan.

Originally posted by @Louis Walthall :

So here is the scenario. We own 4 properties. The one we live in. I own 2 rental SF homes and my girlfriend owns 1 SF home that we rent. We are looking to form an LLC for any future rental properties. Together we make around $200,000/year and live in Greensboro NC. Wondering if we would have trouble getting financing for the LLC on future deals. The properties we own all have equity. About 30K in the one we live in, 25K in one, 15K in one, 50K in another. All generate positive cash flow and have very little trouble renting.

Any help is appreciated.

We always recommend that borrowers exhaust the conventional financing options first because the money is cheaper and the terms are better. You can qualify for up to 10 properties and your girlfriend can qualify for up to 10 properties. In your situation, get an umbrella liability policy that protects you from your tenants and worry about the LLC once you've exhausted your conventional opportunities. Having said that, you should consult an attorney for asset protection (there are a few good ones here on BP).

We always recommend that borrowers exhaust the conventional financing options first because the money is cheaper and the terms are better. You can qualify for up to 10 properties and your girlfriend can qualify for up to 10 properties. In your situation, get an umbrella liability policy that protects you from your tenants and worry about the LLC once you've exhausted your conventional opportunities. Having said that, you should consult an attorney for asset protection (there are a few good ones here on BP).

Stephanie P.

@Stephanie p. Thanks for the response.  I actually have an umbrella policy covering the properties now.  Although I'm just getting really serious about my investment property plan I think I have been taking some the right steps so far.  I plan on being very active on BP going forward and soaking up all the knowledge I can from experienced folks like yourself.  Thanks again. 

@Louis Walthall  

We handle this situation frequently. A transfer to an LLC will trigger the clause and should therefore be avoided, even though banks are hesitant to ever foreclose as long as the note is being paid. Even with the note being paid, the banks will still send threatening letters. This issue can be avoided completely by transferring the property into a land trust.

This article can explain the general process of taking a property into your own name and transferring it into the Land Trust before assigning it to the LLC. The added benefit of this process is that you can also have your attorney sign the public records as "Nominee Trustee" before assigning yourself as the "Trustee" once the Trust has been established. It means your name does not appear on public record for that property, your attorney and their address is the only thing that appears. All the while, you always have control and nobody else, not even your attorney, can manage or sell your property except for you.

If you need to prove ownership for financing or any other reason, you simple produce your company documents as well as your banking and accounting records. Since these disclosures are private, and not part of the public record, it does not violate the anonymity you’re seeking.

And feel free to connect with me if you'd like to know more!