How do you handle ownership and financing?

Question

Looking at protecting myself as much as possible, I want to buy (hard money most likely) with an LLC. When you go to refi out, do you normally xfer ownership to your name so you can get a conv. loan? Or do you normally look at other methods, like commercial loans, that allow for a business to own?

James Dainard · Answer

Hey Mitch,

In terms of leverage you're going to do the best with an owner-occupied loan if you can get it.

Some of our clients will end up getting a conventional loan on their property if they're planning to keep it as a rental then quit claim title into an LLC later on down the line. Check with your lender to make sure this doesn't trigger a due on sale clause for your loan. That tends to be the happy middle ground if you can get all of your bases covered.

Best of luck!

Mitch Larrivee · Answer

Thanks, makes sense. Do people normally hold the property under their personal name during the renovation period as well? I imagine this would avoid any hiccups/confusion with underwriting. I can only imagine the number of questions coming through if my LLC transferred ownership to me and a week later I'm trying to cash-out refi.

Also, that'd be a lot of title transfers.. LLC for initial purchase & renovation > personal for loan > back to LLC for holding.

Andrew Postell · Answer

@Mitch Larrivee you've got some good responses above but just to be clear on this - A "conventional" loan (a loan written through Fannie Mae or Freddie Mac) will require you to hold the property in your personal name.  So do people transfer the title - yes, because they are required to do so.  Now, there are plenty of loans that do NOT require you to hold the property in your personal name.  So if it's a deal breaker for you, then you have options.  But since it's completely fine with any company that's worth their salt we just leave our properties in the LLC name until the day you close.  It's one piece of paper to transfer the name over.HOWEVER (there's always something!) in Florida you pay a tax to transfer the title between entities.  The amount of the tax is dependent on the loan amount that you carry.  So if you CAN purchase in your personal name, and then refinance into your personal name, and THEN transfer title to your LLC....that would save you 1 set of fees. Some other states also have "transfer taxes" of this nature but just be aware of them.

Also, this is not answering the question of "does holding a property in a LLC provide me any protection?"....which is an entirely different topic often debated at length's end.  Just ask any attorney - they can get around it in about 2 seconds.  I've heard "keep your properties in a LLC" or "keep your properties in a land trust" or "have good insurance"....and other things too.  There are properties I have held in my personal name for years (my Florida properties for example) and some I have in my LLC.  Lots of examples, lots of debate, blah, blah, blah.  Just know if you feel this is the right method for you - then you can absolutely get it accomplished.

Hope all of that makes sense.

Lucie Tighe · Answer

@Katherine Blazer would probably be a very helpful resource to you, realtor/investor/loan originator all in one, she knows all the ins and outs of things.

Kyle Deutschmann · Answer

Are you buying with hard money because you plan to buy a property to rehab? If not/if the property is in good enough condition to pass a conventional appraisal then you could skip the higher interest hard money loan and can buy or refinance in either your own name or in an LLC. There are both residential and commercial lending options available where you can have the title in an LLC but the rates, terms and underwriting/processing turn times will vary. I’d recommend speaking to a reputable lender/mortgage broker that can provide both options so you can compare and educate yourself on what option is best for your situation. Alternatively if it’s your first investment property, you could also consider just getting an umbrella insurance policy and keeping the property in your own name to help protect yourself against liability. I’d suggest talking to both a qualified attorney and reputable insurance broker to learn the cost/benefit of each option and compare that to the difference in rates for financing a property in your own name vs. in an LLC.

Jay Hurst · Answer

@Mitch Larrivee

Yes, people do this and it is not a big deal from an underwriting point of view. You have to be able to prove who owns the LLC and you have the authority to sign for the entity etc. Also, if you are pulling cash out you need to make sure that the members of the LLC are going to be the same as will hold it in their personal names. Keep in mind if you are borrowing in FL, you will pay transfer taxes on each movement from entity to personal and back.

and I am not an attorney, but you do want to talk to yours about when the moving back and forth does to your claim that the LLC is a not a sham business and not allow your corporate veil to pierced.  I see a lot of newbie investors that jumbo through hoops to finance in a LLC paying more then they would have to only to not keep finances separate etc. You are not accomplishing what you think you are in that case and umbrella insurance would have been much cheaper and more effective.

How do you handle ownership and financing?

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