Kansas City, MO · Member since 2013 · 3 posts · 1 vote
I want to secure rental properties I purchase under my LLC to mitigate risk but have run into a few hurdles. I own one rental property outright and am seeking financing to purchase another property. I also have an LLC setup but have done nothing with it. I've called several banks about opening a business account in my LLCs name and getting financing but they are telling me that I have to personally hold the property in my name and can't move it to my LLC until I pay the loan off. I understand being personally responsible for the loan but don't understand why I can't put the home in my LLCs name. Am I going about this the wrong way? Are there any good books that walk you through this process? What's the point of have an LLC if I can't buy properties in its name?
Real Estate Broker · Orange, CA · Member since 2008 · 380 posts · 87 votes
12y
correct! All loans on 1-4 unit rental property are backed by Fannie/Freddie guidelines you will not find a lender who will fund a loan in your LLC, Partnership or Corp! There are alternative financing but you probably want the low 30 year fixed Fannie/Freddie backed rates I'm assuming?
What is commonly done is you pull the property out of the entity fund the loan then put the property back into the entity.
People will argue it will trigger the due on sale clause but I am unaware of any of that happening. Worse case is if it does trigger the due on sale clause is the give you something like 30 days notice and you just quit claim it back into your into your name.
Real Estate Broker · Orange, CA · Member since 2008 · 380 posts · 87 votes
12y
correct! All loans on 1-4 unit rental property are backed by Fannie/Freddie guidelines you will not find a lender who will fund a loan in your LLC, Partnership or Corp! There are alternative financing but you probably want the low 30 year fixed Fannie/Freddie backed rates I'm assuming?
What is commonly done is you pull the property out of the entity fund the loan then put the property back into the entity.
People will argue it will trigger the due on sale clause but I am unaware of any of that happening. Worse case is if it does trigger the due on sale clause is the give you something like 30 days notice and you just quit claim it back into your into your name.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
I think Ed got anextra 'not' in there. But we know what he is saying. Fannie and Freddie loan to people, not entities. If the property is in your name, and you are going to do a cash out refinance, the best way I know of is for your closing attorney to add an extra deed to your closing package. Note: I haven't done this for many years, but I have second hand information that it is still viable. The deed will be from you to the LLC. The bank originator and/or underwriter may or may not get huffy about it. Talk to the closing attorney well in advance of the refinaince closing and let the closing attorney know what you are doing. Let the attorney interface with hte underwriter. There is absolutely nothing wrong with this. It isn't illegal. It doesn't violate any underwriting requirements(per Fannie mae selling guide). It does not violate the DOS clause because of constructive notice.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
12y
Hey David! Good news, it isn't just you. LLCs are really hard to deal with. I wrote an article about this a few months ago. More than just the article, read all the comments too. They are very informative.
Real Estate Investor · Abington, MA · Member since 2011 · 356 posts · 114 votes
12y
I know in my area commercial loans have been used for SFR that investors I know rented or flipped. My advice talk to small local banks and ask for their commercial lending department. A god mortgage broker who handles small commercial loans might be able to help as well. It sounds like you own multiple properties you could also look into a blanket loan.
Involved In Real Estate · Biloxi, MS · Member since 2013 · 76 posts · 30 votes
12y
It can be done using a commercial loan. I just renewed one in Sep. The promissory has my LLC as borrower and me as the Guarantor. Rates will be a point or two higher but it's a good way to build a relationship with the bank.
Investor · Belgrade, MT · Member since 2013 · 135 posts · 32 votes
12y
I have similar experience. My banker says no way to LLC, so I move it out when I need to refi or when I buy, then transfer it back into LLC after financing is in place. What my banker doesn't know won't hurt him, but having asset protection of LLC keeps me from getting hurt. It could blow up at some point, but as @Ed Wood said, worst case is bank slaps hand and you pull it back out and have to keep in your name.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
@Patrick McGowen, by doing that you have eliminated any real protection the LLC might have given. Anyone can easily follow the ownership chain and figure out that you and the LLC are at least 'related' entities if not one and the same. From there, piercing the veil of your LLC is pretty straight forward.
Make sure you have a good PERSONAL umbrella policy for real liability protection.
Also the bank might see the trick you are using and decide not do anymore business with you, and then you need to ask yourself was it worth it. LLC doesn't protect you like a good insurance policy will.
Investor · Belgrade, MT · Member since 2013 · 135 posts · 32 votes
12y
Would love to hear more on this. I am going on advice from my lawyer who owns rental properties and at least one other individual I know personally who does it the same way. Transfer property into LLC by grant deed. Does this destroy my protection? Has anyone had corporate veil pierced, or anyone been sued and llc held up?
I am not too worried about the bank losing my future business, I only get conforming loans anyhow and can do that at any other bank in town.
LLC is owned by me anyhow and the taxation passes through to me personally so it wouldn't be hard to prove that LLC and I are related.
My real reason is protecting other personal assets. LLC protection is not worth getting poorer loans.
Corporate veil does get pierced but never make it to court because both parties settle. Let's say if I was hired by a lawyer to find out who is behind an LLC and when I start to turn pages, it might never stop because I go beyond the LLC and if your name is on anything anywhere you are fair game, and you will be a surprise at people that will leave a calling card at every turn.
A judge can order to pierced corporate veil. Once a corporate veil is pierced both parties can settle without going to court because they stand to lose more if it went to court. It is not hard to get a court order to pierce the veil.
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
In the majority of cases the judge will not pierce a veil before a trial of the facts because there is no reason to do so. If the facts alleged by the plaintiff can't be sustained, the state of the corporate entity is moot.
When they do pierce it before trial, they will hold a hearing or hearings where evidence is presented through sworn witnesses.
You aren't going to get a veil pierced just because you found a connection between individual A and Corporation C during discovery. It just doesn't work that way in the real world.
Investor · Belgrade, MT · Member since 2013 · 135 posts · 32 votes
12y
Thanks all for input/thoughts. At this point I figure some protection is better than none, having llc at least makes litigators have to go that extra step to get at personal assets even if it is an easy step. Still this has been very helpful, it has motivated me to find bank that will lend to llc so I can set up a cleaner corp for next property that has less chance of alter ego. Happy New Year.
Peoria, IL · Member since 2011 · 365 posts · 182 votes
12y
If you are OK with a higher rate and 5 year balloons banks will finance to an LLC, just ask for the commercial loan officer, and expect to personally guarantee it.
I prefer to get low interest fixed rate fannie/freddie loans and buy personal liability insurance.
In the majority of cases the judge will not pierce a veil before a trial of the facts because there is no reason to do so. If the facts alleged by the plaintiff can't be sustained, the state of the corporate entity is moot.
When they do pierce it before trial, they will hold a hearing or hearings where evidence is presented through sworn witnesses.
You aren't going to get a veil pierced just because you found a connection between individual A and Corporation C during discovery. It just doesn't work that way in the real world.
Duncan,
It seems I will agree with you here. What people don't realize is they either 1. Need to be personally liable for doing something negligent
2. They need to co-mingle or not treat it as a separate entity.
We have serve corps before and when they don't respond, the judge has no problem signing on the dotted line allowing us to pierced veil. I wonder if Duncan Taylor has ever sued a corp and tried to pierce the veil or just found his misinformation in a book.
We have serve corps before and when they don't respond, the judge has no problem signing on the dotted line allowing us to pierced veil. I wonder if Duncan Taylor has ever sued a corp and tried to pierce the veil or just found his misinformation in a book.
Joe Gore
Okay, how about a case number and the name of the court? Lexis-Nexis can take it from there. If I am wrong, I have no problem admitting it like I have before.
But, there is absolutely NO REASON to pierce an entity's veil during discovery. A judge can compel disclosure without doing that. The one and only reason to pierce the veil is so liability can attach to the individuals hiding behind the entity. There is no reason to do that unless a tort has been proven.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
@Account Closed I have to believe there is way more to it than 'they didn't respond.' It's not that I don't believe you. I just am not convinced I see the whole picture. I get a sense that you are trivializing the overall process, which in 49 other states is non-trivial. You make it sound like you can walk into small claims court and, because the defendant didn't respond to your summons, you will walk out with the personal bank accounts of all the members or shareholders of the company. This doesn't happen.
I'd like to see that court brief. Sounds like you have a bunch of references, but if you can just provide one so we can understand the context of your post... that would help. Here's an NC appellate case with the piercing corporate veil issue front and center. BTW, you don't see this much in NC. Like proving embezzlement, it takes a lot effort coupled with a lot of fraud or other felonious activity to get to this stage. http://appellate.nccourts.org/opinions/?c=2&pdf=4911