Secondary Market Loan Limits with Corp or S Corp

6 Replies

I've heard from a few people that it is possible to surpass the 10 single family property loan limit if you put your properties into a corporation or s corp which holds 10 or less. I can't find anything to dispute this online - only that holding properties in an LLC does not shield you from that 10 property personal limit.

Is this true? Can anyone shed some light on this?

@Aaron Nelson Hmm, to answer your question....not really but maybe.  I know that's vague so let me give some insights here:

There are 2 main loan types in 1-4 unit investment property lending:

1. Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money. So it's Fannie and Freddie that have a 10 loan limit. You must close in your personal name with these loans. You can certainly transfer the property ownership to your LLC or S Corp after closing....but that's who OWNS the property; not who is responsible for the loan. You are personally responsible with these loans.

2. Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different. They could lend to you personally or to your company here.  It's up to the bank itself.  If there is a limit to how many loans you can get...then that's because the bank has that limit.  So then we would go to another bank if you hit that limit.

*WHEW*  I know that was a lot but I hope this helps in the understanding of why there are limits and what the difference in between loans.  Feel free to ask anything additional if you need. Thanks!

@Aaron Nelson @Andrew Postell Explained it well, but in short....if the Loans are still in your name, transferring the Title to the properties to a Corp or llc doesn’t get around the limit of “10 mortgages properties”.

Thanks Andrew and Wayne! I was hoping to be able to deed over the properties into the  S Corp, but it doesn't sound like that will be an option. 


I may just have to play the game and move into multi family!

Originally posted by @Aaron Nelson :

Thanks Andrew and Wayne! I was hoping to be able to deed over the properties into the  S Corp, but it doesn't sound like that will be an option. 

I may just have to play the game and move into multi family!

HI Aaron,

I have successfully implemented these strategies of exceeding the 10 financed properties limit via utilizing an entity to operate/hold your properties.

The guidelines for this have changed over time where you needed to have both the title and the note/mortgage in the name of your entity.

What some investors do is they will max out on their 10 fannie/freddie loans and then they will package them up and go to a local bank like lone star bank in TX and get a commercial note at 20-25yr fixed to refi all 10 into their LLC and remove the liability off their personal name/credit. This would in effect rinse out the 10 financed properties (1-4 residential) from your name and allow you to obtain another 10.

Its a "if or maybe," area of the guidelines to most lenders because most have never had a borrower who had so many properties and also because each underwriter may view the guidelines differently than the prior or next.

To avoid this ambiguity, its important to package up your file correctly upfront with explanations, supporting documents, snippets from guidelines stating "what constitutes a financed property and what doesn't."

This will give your file the highest chances of implementing this strategy.

The other X-factor is the vocabulary used with these local Texas banks that will offer commercial business financing for your rentals. If you talk their language, IE debt coverage, net worth, cash flow, global cashflow, and can quickly grasp their lingo they will see you an experience investor and will be more app to give you financing where your personal name will not be on the note. Sometimes if your LTV is too high you may have to be on the note till it reaches 60% or lower it just depends on your relationship at each of these smaller banks its like the wild west when it comes to small community banks or credit unions.

My favorite are smaller credit unions as CU's typically have no pre payment penalties which allows a RE investor to be more flexible when buying properties, refinancing, moving funds around, and doing new projects. This flexibility is nice as opposed to being locked into a 5 -7 year fixed term note with a huge pre pay or balloon payment.

Best of luck in your RE

 

@Albert Bui that's exactly what I was looking for!!! I'd really like to get all of my properties financed on the secondary market since the terms are more favorable. 

Can I get new secondary market loans in the name of the entity and not in my personal name? It won't do me much good in the long run to refi OUT of the secondary market, back to less favorable terms.


If so, I suppose the steps would be:

1) Form multiple entities to hold 10 or less properties in each.

2) Move properties into the entities so that I only hold less than 10 in my own name.

3) Refi those properties that are now held by the entities at my favorite local bank.

4) *Hold for 6 month seasoning period (I've been told it is required).

5) Refi again into a secondary market

Also, do you know if it matters which corporate structure I use (LLC vs S Corp, Corp)?

Your reply is very much appreciated!

Originally posted by @Aaron Nelson :

@Albert Bui that's exactly what I was looking for!!! I'd really like to get all of my properties financed on the secondary market since the terms are more favorable. 

Can I get new secondary market loans in the name of the entity and not in my personal name? It won't do me much good in the long run to refi OUT of the secondary market, back to less favorable terms.


If so, I suppose the steps would be:

1) Form multiple entities to hold 10 or less properties in each.

2) Move properties into the entities so that I only hold less than 10 in my own name.

3) Refi those properties that are now held by the entities at my favorite local bank.

4) *Hold for 6 month seasoning period (I've been told it is required).

5) Refi again into a secondary market

Also, do you know if it matters which corporate structure I use (LLC vs S Corp, Corp)?

Your reply is very much appreciated!

On the legal end you'd have to consult an attorney on what entity you should use however on the lending end there are varying ways to make this work better since many underwriters don't see these types of scenarios each day. Filing as S and C Corp or partnership will work the best because you'll have move the filing for the properties away from your scheduled E and off to a corporate or partnership return. However in theory it can work with a passthrough LLC with diligent file structuring by the lender.


 

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