Rental Property Investor · Iceland · Member since 2017 · 5 posts · 0 votes
I'm planning to buy a rental property with a family member this summer. She has the cash but no credit, and I have the credit but no cash. Of course we want to end with the property in an LLC, but I'm unsure of how to get from A to B. I've read some disheartening blog posts about buying a property as an individual and then transferring it to an LLC, mainly due to clauses viewing the transfer as a sale and requiring a full payment of the mortgage.
I also saw that some mortgage companies won't loan to LLCs (if the LLC buys the house instead of me as an individual), and of course the loan will have a higher interest rate for an LLC.
However, if I buy the house as an individual before moving the property into an LLC, then my family member would have to "gift" me the down payment and we'd be hit with gift taxes. Besides, it would work for me but I realize that most investors would never "gift" a down payment before financing a property as they lose all legal rights to the money.
So my question is, what is the process to mortgage a property with an investor's money? How do we go from somebody with cash (the passive investor) and somebody with credit (who will be running the rental) to two people with 50/50 shares in an LLC investment property?
Form an LLC with your family member. Buy a property with a hard money loan, find the right property off market at 75% ARV or better, rehab it, rent it out. Then refinance with a lender who has a non seasoning DSCR loan. It will be a little higher interest rate because of the DSCR loan and being in an LLC. But will work great for your situation. Will be able to do a rate and term loan right away, maybe have the hard money loan for a month or two. If you wait 6 months can get a cash out refinance DSCR loan (I've seen it as short as 4 months for some lenders).
Form an LLC with your family member. Buy a property with a hard money loan, find the right property off market at 75% ARV or better, rehab it, rent it out. Then refinance with a lender who has a non seasoning DSCR loan. It will be a little higher interest rate because of the DSCR loan and being in an LLC. But will work great for your situation. Will be able to do a rate and term loan right away, maybe have the hard money loan for a month or two. If you wait 6 months can get a cash out refinance DSCR loan (I've seen it as short as 4 months for some lenders).
@Seth Sutherland If you have to have it in an LLC go as a lender the best way to do it. Putting it in a LLC makes things harder and more expensive. Are you trying to do this in Iceland or Chattanooga?
@Chris Davidson, this will be in Chattanooga. I'm currently a long-distance investor living as an expat in Iceland but my home roots and current real estate is in Chattanooga. I'm curious by your response though - is there a way for us to do this without putting it into an LLC? I guess my family member and I could simply cosign on the property and then write up an agreement as to how we'll split the profits?
Form an LLC with your family member. Buy a property with a hard money loan, find the right property off market at 75% ARV or better, rehab it, rent it out. Then refinance with a lender who has a non seasoning DSCR loan. It will be a little higher interest rate because of the DSCR loan and being in an LLC. But will work great for your situation. Will be able to do a rate and term loan right away, maybe have the hard money loan for a month or two. If you wait 6 months can get a cash out refinance DSCR loan (I've seen it as short as 4 months for some lenders).
This seems like a pretty solid plan; basically do a BRRR as an LLC. I think I need to find a solid lending agent in Chattanooga. The current lender I work with is a nationwide company and they don't do mortgages for LLCs.
@Seth Sutherland As far as the US side you can both be on the loan and deed and split proceeds however you agree to (get it written out and settled before closing). If you were splitting it say 50/50 for easy math you get half the write-offs for taxes and show half the income as well. If you are wanting to go the LLC route start reaching out to lenders and see if it possible. I am working SouthEast Bank right now on some properties in Knoxville and they have pretty good commercial side and residential side as they are a little more local but still operating like a bank vs credit union.
I'm planning to buy a rental property with a family member this summer. She has the cash but no credit, and I have the credit but no cash. Of course we want to end with the property in an LLC, but I'm unsure of how to get from A to B. I've read some disheartening blog posts about buying a property as an individual and then transferring it to an LLC, mainly due to clauses viewing the transfer as a sale and requiring a full payment of the mortgage.
I also saw that some mortgage companies won't loan to LLCs (if the LLC buys the house instead of me as an individual), and of course the loan will have a higher interest rate for an LLC.
However, if I buy the house as an individual before moving the property into an LLC, then my family member would have to "gift" me the down payment and we'd be hit with gift taxes. Besides, it would work for me but I realize that most investors would never "gift" a down payment before financing a property as they lose all legal rights to the money.
So my question is, what is the process to mortgage a property with an investor's money? How do we go from somebody with cash (the passive investor) and somebody with credit (who will be running the rental) to two people with 50/50 shares in an LLC investment property?
There's a lot of structuring that needs to take place on this one.
If you've got the credit and she has the cash, ask her to put the cash either into your account or open a joint account (if you're going to do the LLC) right away. Do it now because the funds need to be seasoned for a period of time depending on the lender. If you're doing the LLC, then make her a less than 20% partner so her credit (or lack therof) isn't a factor. She won't have to be a personal guarantor either. Some lenders are skittish about lending to investors that don't either own their own home or have a mortgage history.
The rate will be the same whether it's in an LLC or personal, but there will be an entity review fee of about $600.
A DSCR loan is the way to go on this one, but you need to make sure you get with a broker that's experienced. Lots can go wrong if it's not structured correctly up front.
Without knowing the requirements of a DSCR loan, that's going to be your best bet. Commercial lenders here in town, while they finance purchases in LLC's all day long will have an issue with the distance and the fact that each partner on their own is not particularly strong, at least based on what's been laid out here. Now if you both make great income then that will offset to an extent but that's not been said. Plus the fact that you are out of the country and presumably your partner is a foreign national in essence makes this a non recourse loan and no one is going to get too excited to do one of those.