Investing without an LLC

14 Replies

Hello NJ investors! I have a question specific to NJ investing... I have my 1st NJ investment under contract and started the formal application process with my lender and they proceed to tell me that they can only lend to an entity (LLC) in NJ. Is this a requirement by the state? I do not have an LLC and did not plan on forming one this early in my investing so I am trying to figure out if I simply need to find another lender or are all lenders going to have to conform to a state requirement?

@Jason D. sounds like it's a requirement for that lender. Other lenders will lend without an LLC. I would recommend shopping around for the right lender for what you're trying to accomplish.

for a single family that makes no sense... might be the hard money lender requirement. maybe they are doing this because they will write something in the operating agreement that they can take over the LLC if you dont pay. ie rather then foreclose set it up so that you lose the LLC to them if you dont pay.

I found it odd as well because they do not require an LLC for funding in Pa. I am currently shopping for another lender, so I guess we'll see what happens. Thanks fellas!!

If your lender forecloses on your investment property you can't buy a property to live in. You are limited to 4 current property loans with your SSN.
If someone hurts themselves on the job you are not liable if you are not negligent or at fault if you have an LLC.
A good lender would never take over an LLC. Who knows what bills or lawsuits come with an LLC.

@Jason D. is the lender who told you that an HML? My understanding is that HMLs will only lend to LLCs and conversely most traditional banks prefer not to. If I recall, HMLs lending to LLCs has to do with being able to lend at such high rates. If they lent to individuals and owner occupants they could be subject to predatory lending penalties. Since they're lending to businesses that doesn't apply.

Thanks for everyone's input. It seems to be a Hard money lender requirement. I've gone ahead and filed the paperwork to form the LLC. It's something that I had planned on doing at some point anyway, and it opens up a lot more options for funding, which is an added plus.

Jason...just wanted to clarify one thing. Commercial Lenders will oftentimes require you to vest in a legal entity, such as an LLC. However, in the case of Residential Lenders ( 1 to 4 unit dwellings) it's exactly the opposite: For Conventional Conforming loans, the Agencies (Fannie Mae, Freddie Mac) will not allow you to vest in legal entities. They require that vesting be in the name of individuals only.

Typically the same is true for residential lending (1 to 4 units) that are Non-Conforming Loans (i.e. portfolio Conventional mortgages). In most cases Non Conforming Investors will not allow vesting in legal entities either (although this is not a hard fast rule ... these lenders can basically do whatever they like, but this is what most are doing now).

@Odie Ayaga - Good to know!
As far as conventional loans, would you recommend an LLC?

I've had them before and dealt with all that but am on the fence if it even matters. Only reason was privacy, but even then, a simple search can dig up names. (Being the creepy stalker I am. Haha)

Put your lawyer as the resident agent for your LLC. Add a little distance between you and the snoopers. Your lawyer legally can't say who owns the LLC because you told him not to unless served a court order.

There are two main motivators to vest in an LLC (aside from privacy). One is for legal protections (such as liability claims) and the other is for tax purposes (i.e. if the investor in the property is necessarily and actually a legal entity then having the property in the name of individuals might present issues from a tax, accounting and corporate ownership point of view). Attorney's and Accountants have the best answers from these perspectives. Insofar as Conventional Conforming Loans are concerned...vesting in LLCs is simply not allowed when the loan is being originated.

@Alice K. , @Robert Gregg 's response covers it pretty well. As a flipper with a partner an LLC is a natural route for me to go as there are various reasons why in flipping it can make sense to flip each house in the name of an LLC whether it be for arranging investors or getting hard money. In the buy and hold world it gets hazier. As you buy more and more properties investing in the name of an LLC can be greatly beneficial for the reasons Robert stated, but that can make it more difficult to get loans for 1-4 unit properties. At that point it seems to become more of a balancing act in terms of what you in your particular situation need at that time and what you have available to you.