LLC cash purchase moved to investor capital

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LLC cash purchase moved to investor capital

Ryan Morrissey
Rental Property Investor · New York, NY · Member since 2021 · 16 posts · 4 votes

If I were looking to purchase a property with cash through an LLC and get it cash flowing with LTR or STR (depending on property). Then, have an investor refinance the property with their financials while being added to the LLC as a partner and they pay me the principle back directly, so essentially they are funding the purchase once the dust settles and my initial investment is paid back (or close to it). What's the best loan to approach for this scenario? Classic cash out refi? Are there any lenders willing to leave less than 20% equity in play (ideally 15% or 10%)? What potential hurdles do you see with this approach?

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David M.
Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
4y

@Chris Seveney I think the issue is the resources are "reversed."  The investors don't have capital, they have "credit."  So, the "loan" is actually the "investor" taking out a loan.  The OP says he has the cash.

@Bill B. The cash out refi is possible since the "investor" would be a member of the LLC... But, I agree this is very messy. Its not a "fair" setup, but I'm not sure which of the two is making out like a bandit potentially.

@Ryan Morrissey I think this is confusing since normally an "investor" is somebody with capital / resources.  But, you are saying they don't; they only have "credit."  You can certainly do anything you want, but probably better to run this like a normal deal where get paid as a GC and property manager, and they buy the propery with their credit and take the risk...

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y

    @Ryan Morrissey

    Why add them to LLC as a partner and not just take a loan from them and record a mortgage?

    If they are being added to LLC it's not a loan but now they have a % of ownership in the LLC and will need to determine operating agreement their ownership and then you technically could still finance the property..

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  • Ryan Morrissey
    OP
    Rental Property Investor · New York, NY · Member since 2021 · 16 posts · 4 votes
    4y
    Quote from @Chris Seveney:

    @Ryan Morrissey

    Why add them to LLC as a partner and not just take a loan from them and record a mortgage?

    If they are being added to LLC it's not a loan but now they have a % of ownership in the LLC and will need to determine operating agreement their ownership and then you technically could still finance the property..

    My goal is to have them foot the investment capital and I supply the sweat equity and we share ownership of the property.  Some of my potential investors could qualify for a loan but cannot afford to purchase in cash.  With as difficult as the market is or if I was looking at a property that wouldn’t qualify for a conventional loan, I’m trying to come up with an angle where I front the cash purchase, but then recoup my capital and have the investor carry the loan.  Then we share the property where I manage it and they receive passive income.  Does that make more sense?
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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    4y

    @Ryan Morrissey

    I guess you could... you do realize that "none" of your properties would qualify for a conventional loan if you use a LLC? Legal entities are not eligible for conforming residential loans.

    It does seem kinda silly.  If you can afford the cash to purchase and I am guessing fixing up the property, why do you need the investor?  You seemed to have painted a "great" looking brrr...  

    Either way, the LLC needs to take out the loan --- members would just be guaranteeing it. I guess you really should just form an LLC together and have it pre-agreed in the Operating Agreement that you will get cashed out when the LLC refi's...

    Oh, maybe I misunderstood--- its cash flowing since you bought it with cash but won't be after you encumber it with a mortgage?  That would be slightly different..

    With the turn in the market, I don't believe they are doing less than 80% ltv.

    I still sort of think the investor should be the Note holder and/or you should just be the property manager at the end.  You really don't have anything in this game and if I was the investor I wouldn't share the equity if it was covered under my credit.

    Good luck.

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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    4y
    Quote from @Ryan Morrissey:
    Quote from @Chris Seveney:

    @Ryan Morrissey

    Why add them to LLC as a partner and not just take a loan from them and record a mortgage?

    If they are being added to LLC it's not a loan but now they have a % of ownership in the LLC and will need to determine operating agreement their ownership and then you technically could still finance the property..

    My goal is to have them foot the investment capital and I supply the sweat equity and we share ownership of the property.  Some of my potential investors could qualify for a loan but cannot afford to purchase in cash.  With as difficult as the market is or if I was looking at a property that wouldn’t qualify for a conventional loan, I’m trying to come up with an angle where I front the cash purchase, but then recoup my capital and have the investor carry the loan.  Then we share the property where I manage it and they receive passive income.  Does that make more sense?
    Why give up the equity is what I was mentioning? Why not just have them loan you the money to buy the property? 
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  • Bill B.
    Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    4y

    They obviously can’t do a cash out refi since they don’t own the property. I think you’re going to find the llc is a horribly limiting factor for what you’re trying to do. Maybe right from the start you put down 20-50% and they get a loan for the rest? You’ll have to figure out ownership percentages but that’s a double edged sword. You should have a partner because you can do it without them. They shouldn’t give you any equity if they’re borrowing the entire purchase price. But don’t forget. Whatever percent you or they try to hang on to. That’s how much cash you/they’ll be dish out out for the rehab and the vacant expenses. 

    Realistically. It sounds like a lose lose. 

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  • David M.
    Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes
    4y

    @Chris Seveney I think the issue is the resources are "reversed."  The investors don't have capital, they have "credit."  So, the "loan" is actually the "investor" taking out a loan.  The OP says he has the cash.

    @Bill B. The cash out refi is possible since the "investor" would be a member of the LLC... But, I agree this is very messy. Its not a "fair" setup, but I'm not sure which of the two is making out like a bandit potentially.

    @Ryan Morrissey I think this is confusing since normally an "investor" is somebody with capital / resources.  But, you are saying they don't; they only have "credit."  You can certainly do anything you want, but probably better to run this like a normal deal where get paid as a GC and property manager, and they buy the propery with their credit and take the risk...

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