LLC with commercial mortgage VS personal regular mortgage

10 Replies

I just bought REO property as my own residence and renovated it inside out(which is almost done).

Now I am planning on my next investment but I have trouble deciding path for finance.

On one end I can get an HELOC on my primary residence and use my savings and HELOC(if needed) as a down payment for next property and buy it under my personal name with 4.75%ish interest rate and 30 year term. (and FYI I know many lenders will not do HELOC this soon , but my local bank that I use is willing to work with me on that). Which also leaves me from using LLC protection but many lenders also give 85% LTV which is a nice plus and they are easier to get.

On other side, I can create an LLC and use my savings and HELOC (if needed) as my capital and fund deal for next investment property. My bank's commerical department does 75% LTV and they also do renovation part as 75%. But of course closing cost are higher and they offer 5 year 5% fix rate and 15 year variable, which I believe is standard. In this way I can use LLC protection but interest and terms are not as favorable as buying under my personal name. Plus 20 year term also reduces cash flow which is more important for me then little faster payment with small term.

Should I go any of above way for reasons I mentioned above or something that I miss ? Is there any other way that deal can be structured that I don't know about?

Thank you all for your time and effort. 

I'm grinding over the same thing Neerav. I closed on a Foreclosure back in May, completely renovated it, and got it on a 2 year lease. I've knocked out the BRR but it's the third R that is the kicker. I currently own the house outright in an LLC and wanted to keep it that way but will probably put it back under my name in order to get much better terms on the cash out refi loan. I'm being quoted the same rates as you for the 30 year fixed. Now the bank is telling me I have to wait 6 months before I can begin the cash out refi which is only another month but that means it will be at least a couple months until I get the cash and I'm itching to get back in the game. It's been frustrating to say the least. I'm going to make some more calls tomorrow. Sounds like you've found a local bank that is user friendly. I'm still searching for one of those.

Brian

Hi @Brian Pinckard ,

Below process might help you because in that way I found my local bank that gives me little freedom compare to big guys.

I went to google maps and just types "banks near me" and started to go through list and removed big banks from there. After that I saw for the particular bank if it had more then 5 branches , I removed those and then started calling. One thing you might want to ask is "Are you using federal money or keep loan in house?". If they keep loan in house then BINGO!!! In that way they can set there own rules to some extent.

Then I will say start to cultivate relationship from there. Open account with them , may be put your partial direct deposit from salary(if you have w2 job) in there.

One more thing - you mentioned you own a home "Outright". Does that mean you don't have mortgage on that? If yes, than I heard about Fannie Mae exception in one of recent BP podcast. What it basically means is , if you bought home via cash or hard money , then Fannie mae gives you exception for cash out refinance and you can refinance before 6 months. So I will suggest try lenders who uses Fannie Mae and explain them about this exception. And I will assume many of lenders will not know about this, so be ready with your answers.

I find the 30 year fixed interest rate to be more advantageous than the protection that an LLC might offer. In Colorado, premises liability extends beyond the property owner to also include a "person legally responsible for the condition of real property". In Colorado, if you're self managing, you've got to look more closely at the legal analysis than simply how title is held. I suspect it's similar in many other states, but I can't say.

Delayed financing exception is nice if all requirements are met.  Have used it a bunch.  They do require the "cash" used to purchased the property with to be sourced, so you have to prepared to pay it back to where it came from.  This can be an issue if the "cash" came from another cash-out financing, since in that case you do not want to have to pay down the 30 year loan you just obtained a few months prior on a different property.  Learned that one the hard way. 

@Neerav Patel

Get a regular bank loan and cash out refi instead of HELOC. Payments and interest rate will be lower, which helps your DTI and ability to afford the next house. Or do both for maximum leverage; refi up to 80%, then find a local community bank or credit union who would let you go up to 100% on the HELOC. Don't use the HELOC unless you need to, and only use it for short-term things.

You don't really need an LLC if you're just starting out and don't have much net worth. High leverage and a good umbrella insurance policy will protect you from lawsuits. Unless you're flipping, then yes do that in an entity.

@Neerav Patel

Thanks for the tip on the 6 month extension rule!  I'm amazed out of all the mortgage loan officers I've talked to no one has brought that up.  I basically copied and pasted your last paragraph to a mortgage loan officer I had just talked to earlier in the day.  She had told me I would have to wait for the 6 months to begin.  I asked her if she could look into what you had mentioned.  10 minutes later she emailed me back and said we are good to go right now.  Wish I would have known about that little gem a couple months ago! 

I've been trying to work with local banks for many of the reasons you eluded to.  Heard Brandon talking about that on a Podcast a while back.  Just haven't been able to make it work yet even with their in house loans.  Definitely want to get those relationships established because I eventually intend to max out my 10 Fannie Mae loans. 

BTW, the mortgage loan officer I spoke with was from First Citizens.  The cash out refi interest rate quoted was 4.625.  Not bad in my opinion.

@Carl Dowdy 

My next research project is getting a good umbrella policy for the 3 rentals I currently have.  Do you have any company recommendations Carl?  Is it possible to have a blanket policy for all 3 properties are will each one have to have it's own individual policy?

Brian

@Brian Pinckard One umbrella policy. As the name implies, it’s intended to cover liability for most everything (after the primary coverage in most cases), from driving your car to mananging your rentals. Compare rates for $1M, $2M, and $5M, and see what makes sense for you based on your assets. I use Owners Insurance Company (aka Auto Owners Insurances Company) but I haven’t shopped it in  a while and I’m not sure if they write in NC. Doesn’t have to be the same insurer you use for other insurance, but there may be discounts for bundling. 

@Nghi Le Thanks for reply. So are you saying get a regular bank loan, fix the property and then refi? That does sounds good , but can create a problem for rasing fixing money and sometimes might consider home as not livable and create problem for a regular mortgage. Is there something we can do in that situation?

@Brian Pinckard glad my advice helped you to get ahead for your deal. I love that part about BP , we can post a question and people's advice can help a lot. 

@Neerav Patel

Just to confirm, the current property that you've already renovated (or close to it) is also your primary residence? This is what I'm assuming when you said you purchased an REO as your own residence. If so, this is what you want to get a bank loan on, after you've completed fixing it up and it has reached its full ARV. Are you saying you don't have the funds to complete the renovation?

Unless you're talking about more than one property that you already have.

For your next deals, hard money is usually the easiest and fastest way. You can use your money from the cash-out refi or HELOC as down payment. Bank money is also possible for flips, but only if you can get a long closing date on it.

Originally posted by @Neerav Patel :

@Nghi Le Thanks for reply. So are you saying get a regular bank loan, fix the property and then refi? That does sounds good , but can create a problem for rasing fixing money and sometimes might consider home as not livable and create problem for a regular mortgage. Is there something we can do in that situation?

@Brian Pinckard glad my advice helped you to get ahead for your deal. I love that part about BP , we can post a question and people's advice can help a lot. 

 Another option is to use a home style renovation loan which does accommodate primary residences 1-4 unit, second homes 1 unit only, and investment/non owner properties as well (1 unit only).

The LTV's are similar to regular conventional financing from 75-95% LTV with the lower being investment and the higher being primary residences.

The benefit is you can combine your purchase money loan and your rehab cost into one loan upon purchase and your rate is 5.00% or less as of current rates while with hard money you may be in the double digits with multiple points.

The downside being that you may need more time to close, these renovation loans typically take 40-60 days to close.

Your original question basically strikes at a balance of asset protection (LLC hysteria/hype) versus financing optimization (best rate/terms/etc). I think @Nghi Le mentioned some good options for you above. 

There are pro's and con's to each decision and as you search more info Im sure you will find a balanced solution that fits your situation.

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