After being involved in purchasing approximately 12 SFR over the past 10 years, and listening to hundreds of real estate podcasts, there is one question I have never heard addressed in any detail. I'm hoping the experts on BP can help me out. So let me explain...
Everyone talks about buying properties in your personal name to get the best financing (30 year fixed ,lowest rate), then deeding the property over after closing to a LLC for asset protection. We have done this for a few properties, then proceeded to claim all the revenue and expenses through the LLC. I would assume many of the BRRRR investors are doing the same. The problem this seems to create is you now have a mortgage in your personal name, but are not showing any of the associated revenue on your personal tax return (it is all being shown on the LLC). This would seem to create a situation where each property drives up your debt to income ratio, making it harder to ultimately qualify for the 10 conventional mortgages that are allowed. We have a 2 person LLC, and after financing many of our properties directly through our LLC using 15 year mortgages, we are now interested in maxing out our 10 30 year mortgages while rates are so favorable, but we really have not found a good answer to this question.
Does anyone have any suggestions or best practices around this topic? It has been frustrating to hear all the talk about BRRRR, yet no one has ever addressed this particular financing issue.
Thanks in advance
The bank asks for your personal and LLC tax returns. Most cases partnership or "S" Corp carries to the your personal taxes.
Depending on how you structured your LLC, it is a pass-through entity. We use the term "pass through" because you can claim the income of these types of businesses on your personal income tax returns. Ordinarily, you would have to file a separate return for your business (or businesses).
Thanks for the quick replies.
Yes, our LLC is a pas through, so we show the profit or loss on our personal taxes. With depreciation, as well as the lower cash flows created by the existing 15 year mortgages, we show a loss each year for our LLC. There are also considerable expenses associated with rehabbing these projects to make them rent ready, so our early years for each property show considerable losses. My understanding is the bank should add back the depreciation to get a clearer view of true cash flows.
@Chris Presnell Yes, the income is going to flow to your personal return regardless. Yes, banks should add back depreciation to income calculations.
A couple of observations though....
The 15 year verses 30 doesn’t show a lower net income, as the added principal payments aren’t a deduction....it raises it, lower interest payments verses a 30 year.
When renovating vacant properties to place them into service as rentals....the costs get depreciated instead of expenses, so you shouldn’t have large write offs in the beginning.
I am currently in the process of purchasing an investment property in my name although I had previously set up a LLC. I learned quickly that financing the property in the LLC was going to be cost prohibitive, and that's why I'm financing it in my name and not in the LLC.
I'd prefer to have the property in the name of the LLC for obvious asset protection reasons but I'm concerned that the lender could call the loan for immediate repayment if I deed the property to the LLC after the legal closing (there is a clause in the agreement). If it helps, I was told by the lender that the loan would be sold to Fannie/Freddie after closing.
How are other investors managing to get the property deeded to their LLCs without being concerned about their loan being called?
I’m closing on the loan within 2-3 week. Help!