Beginner's oops! Looking for way to finance my LLC owned rental.
I have a fabulous lender and told him we were looking to purchase a rental property. He sent over prequal pprwork. I didn't think to mention that our LLC was to purchase and own the rental, and not me personally. That tidbit of ownership put a halt to being able to work with him.
Am I looking at going through a community bank? Having an ARM? This is completely new territory as we have stellar (personal) credit and I had not given a thought to not being able to obtain at 30yr fxed 4.5%. Then paying on principal.
This is new territory and I would like advice on how to proceed in finding a lender for my LLC property (we are in TX)
I was just told by the bank to buy the property in my name first and then put it into the LLC after closing the deal.
There is no real need to use an LLC at all unless you have equity partners. The supposed extra protection is largely non-existent. What you need is manageable risk. Buy SFR or MF up to 4 units in your own name and get $300k liability insurance (maybe more on multi-unit) on each property along with a $1-3 million Umbrella policy over all of them.
My credit union financed two of my properties (one on initial purchase and another was refi'd). Plenty of ARM products but only a 15 year fixed. Probably 1.5 points above conventional financing with a personal guarantee.
I'm waiting to hear from our bank to hear what their offer is.
Hi Doug - one main reason we are using a LLC is to protect our rental from being unprotected assets in the event of a personal legal claim. We have been in this position before and have been advised by a trusted corporate lawyer to set up this structure as a multi layer protection vehicle.
Like @Doug McLeod
mentioned above, my attorney stated LLC's just generate a lot of extra expense and paperwork, and recommended to me just to use an umbrella insurance policy. Your attorney may say otherwise; just adding my personal experience. There are a number of posts here on the pros and cons of LLC's.
You can purchase in your name, but you can't transfer it to an LLC without the lender's knowledge. You can't get a 30-yr conventional mortgage in your name, then expect to keep that when it goes into an LLC. The lender will want a personal guaranty, and you'll be looking at a commercial loan with something like a 25-year amortization, 5 yr balloon, and only 75% LTV. (Obviously terms vary...point is it will be a more stringent loan since it is commercial).
I agree with some of the comments here, but there are a couple more things to consider. If your goal is to get residential rates and fees on your financing and not have to do an adjustable or a loan that recasts every 3, 5, or 7 years like a commercial loan does, then yes, you will need to buy the home in your personal name and then consider changing title to the LLC down the road.
However keep in mind that you are still personally liable for the loan at that point, and when you do make that change, it actually violates the Due On Sale clause in the loan. It would be up to the lender if they decide to take any action because of that violation, if they even find it to begin with. Typically it shows up to the lender when you make the change on your insurance policy and the insurance company sends them a notice.
As far as your insurance policy, I would recommend that you get pricing on 1 million in liability coverage on your primary policy, typically it is not that much more than the 300K costs, I would definatley follow that up with a min. of 1 million on an umbrella, because the umbrella gives you secondary coverage on all your properties, your vehicles, your rec. vehicles, some business pursuits, and possibley even liable and slander if you have those endorsements on your primary policy. Check with your agent.
As far as the LLC costing you more money than its worth, I dont agree. You can set up an LLC for just a couple hundred dollars, and it becomes an additional layer of protection for your personal assets, or any assets held outside that LLC. That may be important to you depending on how much you have in assets, and how many assets you will accumulate over the next 10-15 years.
There are also some tax advantages to owning an LLC that you dont get with personal holdings, check with your accountant.
Just my 2 cents.
Oops, forgot one other point?
Another reason to consider an LLC is to seperate the type of business that you may be doing. What I mean by that, is you might just be planning on buying and holding properties as rentals for 1 year or more at this time. Thats fine. But if down the road, you plan on flipping properties, and your doing it all through the same LLC, the IRS is now going to consider you a dealer, and if all properties and transactions went through the same LLC, then the dealer status applys to all your transactions regardless. You pay a much higher rate if you are classified a dealer. So with that in mind, again I would choose the LLC route, and I would plan on splitting my different types of deals into different LLC's.
Just my 2 cents
Kevin, et al -
Thank you all kindly for your time, effort and experience in helping me along. It is appreciated more than you know!! You guys are awesome.
To ad a bit of framing around our LLC structure we have a layered corporate structure (S-Corp Taxed LLC's) to protect our personal assets and vice versa.
Currently we have a forward operating management company that handles all of the rental transactions & ops. However, our holdings company actually owns the property. i understand there is a ton of paperwork and tax headaches that come along with this, however, we have been through a federal level legal ordeal in the past and we're not going to allow ourselves to be that exposed ever again.
God forbid, in the case of a random car accident, where the opposing parry wants to sue beyond our umbrella limit, our property assets would not be judgement proof. This is our attempt to keep them all protected.
Just a little background on the motivation behind the structure and the questions.
So, while we have suberp credit and personally qualify for a great loan, we are looking to have the LLC obtain the loan.
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