Hello BP community, really need your advise here.
We are a group of 5 people wanting to invest in multifamily residential property. This is our very first time and really confused whether to go for conventional loan or commercial loan.
We don't want our names on loan since it will affect our personal future loans down the road so we thought about forming an LLC but LLC needs commercial loan and interest rate is higher for that so difficult to maintain positive cashflow.
I know I can’t have the best of both worlds but really wondering how do newbie investors go about this? Any advise appreciated.
I checked about due on sale clause too so transferring the loan on LLC later is also not an option.
The only time you you go commercial is if the property is a MF 5+ units or greater. You can avoid having the property hurt your chances of buying homes down the road by structuring the mortgage payment through a business checking account formed by the (5 people) as an LLC/Trust how ever you decide. The business checking account is tied to the business which assumes the liability by paying for it out of the business checking account. You can form the LLC after the purchase and put 1,2,3 buyers on the loan it does not matter.
There are several ways to buy a home with partners and without having to go commercial.
Hi @Jason Wray thanks for your reply. But even with a business account, loan will be on my name right? So in that case why wouldn’t it affect future loans? Sorry I am still new to this so having lot of questions
@Jay Malaviya You can get a commercial loan in your LLC name, They will run your credit but the loans do not show up on your credit report .
Hi @Fred Shatzoff yes I am aware of it. My only concern with commercial loan is that interest rate is very high and loan term is short so we can’t get positive cash flow.
If you’re not able to positively cash-flow with a Commercial loan, the property may not be a wise acquisition (unless you have a plan of value-add and then expect the property to easily cash-flow).
You are wanting the best of both worlds, which you can't have. If 1-4 unit, in order to get the best terms you must do a conventional loan, meaning Fannie Freddie. I would do a Fannie Mae loan, as Fannie as of 6/1/2016 changed their rules and now allows you to transfer title after closing to a LLC that has the borrowers on the loan as the majority members of the LLC.
If you want a loan to the LLC without personal guarantees, that would be some Non-QM loans or some commercial loans, however the rates tend to be 2% higher than Fannie Freddie.
Your concern is that having this loan in your personal names, will mess up the potential for future loans. My comment is, it really wont do that if your rents are at least 25% more than your PITI mortgage payment on that property. AT that point it isn't hurting your debt ratio in any real big way, so it wont cause a debt ratio problem going forward.
If it were me, I would do the Fannie Mae loans in 1 persons name with all parties on title. You can each have up to 10 loans, so if there are 4 of you, you could have potentially 40 properties collectively before being out of Fannie Mae slots. At that point, I would roll them into a commercial blanket loan, thereby opening up your Fannie Mae slots again, to buy another 10 each.
You cant avoid the additional costs of a Non-QM or Commercial loan if you plan to grow beyond 10 units each. Its just a fact of life, so embrace it, plan for it, and mitigate the effects of it.
I hope this helps?
@Jay Malaviya You can get a 30 year fixed rate loan with these programs. What is your definition of high rates? Some rates are as low 5.25%. If property cash flows and you qualify does the rate matter. Remember Fannie Mae only allows 10 loans and it is a full doc loan. The more rentals you have the harder it becomes to qualify.
Your concern is this loan hurting your DTI or future mortgage approvals is understandable but it's an easy fix. Like I mentioned you would open a business checking account and pay that mortgage out of the business account. That removes the monthly debt obligation away form your personal. Banks have to look at who/what is paying the debts in order to allocate the debt obligation. This would be an investment property so it would not hurt you or any of the other (4) people in getting a primary home as it does not use those benefits.
Feel free to reach out to talk!
Kevin, I am very interested in the Fannie loan for my 2-4 unit multi family properties in Connecticut. how do I find a Fannie lender to help me apply for that type of loan?
@Peter Sosnow I have just sent you a PM of our branches in Connecticut that can help you.
@Jay Malaviya I have a duplex under. Contract with no funding AT ALL. Please contact me!
@Kevin Romines thanks much Kevin! This is very helpful.
Don't be so confident on the idea that transferring it over to the LLC will trigger a due on sale clause @Kevin Romines . I don't know what state you're in, (and heck, I don't even know if it's state specific) but there have been some recent changes as to whether or not transferring (quit claims) to a LLC would trigger the infamous due on sale clause. It's my understanding that this is no longer applicable in CT. Do your own due diligence, of course.