Need to add co-signer to LLC as a member to make him eligible

7 Replies

A year ago, I purchased two Four plex with the plan of improving and refinancing within a year time period. More or less the BRRRR strategy. Of course there have been all of the unexpected learning experiences from this venture, and as I foresaw, there is one final challenge.

Since I originally purchased the properties, my credit has gone from 710-595 due to pretty much going all out in the real estate industry and just doing as much as I can, as fast as I can, and until recently it was working out pretty well.

My hard money lender will refinance my properties with a 7.775 cash out interest only loan (unfortunately a 3 year lock in with a prepayment penalty something along the lines of 3,2,1, each year. Over all with my score at the moment I'm fairly happy with the interest rate. 

They brought up that if I had a co-signer that they could lower the interest to 7.375, so I decided to bring my father in on the loan, but because my credit didn't qualify alone for their program, the problem is they want him as a member on the LLC.

As of now, I am the only member, and with this change I am concerned for the following:

-How can this affect my taxes, and business?

-Does this truly have to be permanent, or can I just add him and then remove him after approved and eat the cost?

-Can being a member in the LLC negatively affect him?

-Am I able to put him as .01 percent owner or less with no pay outs or are there minimum requirements? He is not looking to get any income from this at the moment.

-Any important points that I'm missing would be greatly appreciated.

I hope I explained clearly.

Thank you all for your expertise. 

(702)234-2943

From what I can see it doesn't affect him by me adding him onto the LLC for loan purposes. It could affect my taxes.

But say everything went bad. He has no money in the deal, and since he is a member on the LLC for this deal, he is not personally liable. The bank would not go after his property, nor credit to the best of my understanding. They would repo the properties, which with this loan will still have 120k equity, and if they are owed more, would go after other company assets.

At the moment, I'm not seeing where this could really affect him.

I'm writing this post on his behalf. All of a sudden he got nervous when he needed to be added to my LLC. I don't think there is a reason to be nervous. Imo it's even safer than personally guaranteeing.

(702)234-2943

-How can this affect my taxes, and business?

Adding a member in the LLC has no tax implication for you. 

-Does this truly have to be permanent, or can I just add him and then remove him after approved and eat the cost?

The operating agreement has to draft and followed when he wants/ has to get out.  The appreciated asset might trigger tax when he gets out but also depends on how the operating agreement is drafted.  Need to talk to a lawyer and CPA on that or a Tax Lawyer. 

-Can being a member in the LLC negatively affect him?

No, and you have enough equity if this goes south. and If LLC is maintained as a seprarate entity, he has limited liability. But there are always risks of a market and wiping your equity. Make sure you separate the entity from personal finance so you get desired limited liability. 

-Am I able to put him as .01 percent owner or less with no payouts or are there minimum requirements? He is not looking to get any income from this at the moment.

You can virtually do anything without trying to scam IRS with properly drafted agreement even with 0% payout to him and very little contribution from him. You really need to talk to a lawyer on this. This is the one area you dont want to do your self if you have a complicated situation like yours. 

@Ashish Acharya

Everything you outlined is pretty much what I figured and tried to explain to him Nonetheless, he is scared to move forward all of a sudden. It seems like I will need to find another cosigner to join the LLC.

Lesson learned on running up the personal credit cards.

I actually don't have a good business attorney. The one who organized mine originally didn't do an operating agreement, and also set me up with an LLC to flip houses (which I have since learn is not ideal). Do you have any attorney recommendations?

(702)234-2943

@Christopher Dunson

How are the properties currently financed? 
If you brought them outright - maybe you want a couple months for you to pay down your debt so your score improves and you can get the loan
If you have a hard money loan - then yes i agree you want to refinance asap.

Have you thought about having your dad gifting you some money to pay off your credit card bills, pay off the credit card bills, wait for your credit score to improve and then refinance by yourself?
Once you get the refinance you should be able to pay back your dad if the properties did increase in value(which it should if you did the BRRRR strategy).

If you still go the father in the LLC route - I would also confirm with the lender that they are okay with your father having any ownership percentage in the partnership. They may want him to have at least a certain amount.

Basit Siddiqi, CPA
917-280-8544
Originally posted by @Basit Siddiqi :

@Christopher Dunson

How are the properties currently financed? 
If you brought them outright - maybe you want a couple months for you to pay down your debt so your score improves and you can get the loan
If you have a hard money loan - then yes i agree you want to refinance asap.

Have you thought about having your dad gifting you some money to pay off your credit card bills, pay off the credit card bills, wait for your credit score to improve and then refinance by yourself?
Once you get the refinance you should be able to pay back your dad if the properties did increase in value(which it should if you did the BRRRR strategy).

If you still go the father in the LLC route - I would also confirm with the lender that they are okay with your father having any ownership percentage in the partnership. They may want him to have at least a certain amount.

Currently the properties are financed through hard money, and the hard money lender is also the one with the refi program as well. I've done plenty of business with them (6 deals), and all with good turn outs, but this refi program has a score requirement and unfortunately my good history with the company doesn't come into play in this situation.

Honestly, to the best of my knowledge, I'm better off financially than my entire immediate family put together, so I would assume he doesn't have much more than 5k in his account.

I was already planning and prepping for this refi ahead, so I spoke with a lender months ago to see what I would have to do to get my score where it needed to be, and they told me to pay off around 10-15k. I paid off 10k and two cards lowered my limit, so I paid 5k on another and they lowered my limit, so in the end my utilization rate has hardly improved, along with the score.

I'm always assuming something is going to happen, and I'm going to be challenged to MAKE things work. In the end, I can sell and be in a great position to 1031, but then I would have tax requirements on a portion that I would need to take for credit, and individual loan and interest purposes. If that its my best option then I'll deal with it, but I'm trying to build cashflow and equity, so I would be starting over on that end. Maybe if I'm forced to sell, I can turn this into a blessing.

(702)234-2943

@Christopher Dunson

If you're pretty confident you can get your credit score up (by paying off your debts) in less than a year, maybe extending or refinancing into a new hard money loan until you can refinance into a bank loan might be the ideal way to go.  You can still get a 10% hard money loan for a year with a 595 score.

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