house hacking under an LLC?

13 Replies

hello BP,

I am preparing to purchase my first investment property which I plan on living In one of the units and renting out the others.  Something along the lines of a duplex/tri-plex is what I am leaning towards.  

I was was wondering if there were any benefits to purchasing this property under a business name/LLC knowing that I would like to purchase more rental properties in the future? Also, I recently wholesaled my first property so this has also got me thinking about creating an LLC or other type of business entity.

Can someone educate me on when / when not to create a business entity and what the benefits might be?

If you are looking to obtain residential financing for this home you will need to buy it in your personal name. Banks won't lend to an LLC.

Originally posted by @James Wise :

If you are looking to obtain residential financing for this home you will need to buy it in your personal name. Banks won't lend to an LLC.

Banks won't lend to an LLC? This is the 1st I've heard if that. Banks loan to llc's all the time, can you please explain? I am relatively new to rei.

i can understand somewhat, i believe if you back the loan personally then they'll do it. Here in FL a hard money lenderr won't loan to you at all without an LLC, i know your not looking for hard money however.

Banks won't/can't give traditional 15/30yr mortgages to an LLC it's a Freddie/Fanny Mac rule. Banks do lend to LLC but with commercial loans.

Traditional residential financing the property needs to be in your personal name.

Banks will not do a residential mortgage for a 1-4 unit property

@james wise. When would it make sense to set up an LLC?

@Nick Mazzarese everybody has a different situation. If you have a business partner set up an LLC if you are investing in buy and hold properties. If you and your partner are flipping or wholesaling set up an S-Corp. If its just you on your own, operate as a sole proprietor for a few years. Purchase a good liability insurance policy. See how things go. How much insurance? How much is your net worth?

thanks all for the clarification.

@Nick Mazzarese, my CPA explained to me that if there is enough equity in the specific property i should do 2 LLCs, 1 for the management of it and one to hold title in, makes sense

Yeah, read up on what LLC's do and S-corps and such. Ask advice, learn that stuff. I use several LLC's. I just think its cleaner on the books to have a company and get a small salary and such, and you better believe my company pays for a LOT of stuff I would have to if I had a 'real' job.

On the lending, the "house hacking" thing (which is all over the place now and until the posts here recently I've never heard it called that) works great with Fannie Mae money on 30yr mortgage loans at the crazy low rates we have now. If you form an LLC and go for a loan, first off, the LLC has not income or assets so will have trouble qualifying, second, you will be in a commercial loan which will raise the rate a point or two and have a shorter amortization and probably a balloon payment.

This may be a little over complicated, but if it were me, I'd do the loan in your name, put the house in a trust right after you close and make an LLC the beneficial interest of the trust (basically just run all the expenses and income out of the LLC because a piece of paper in your filing cabinet says you can). Get some help/advice on that before you do it, but that's what I'd do. I dont like having anything in my personal name.

Your LLC offers some lawsuit protection, but its not an end all. The anonymity of what you own is more important IMO. Lawyers dont like to work for free and if they see a lot of work to pierce a corporate veil with very little payoff they'll go away. Tax wise its about the same, but I like corporate expenses vs. write offs and my company is pretty crazy generous with not firing me when I buy dumb things on the corporate check card...

Originally posted by @Nick Mazzarese :

@james wise. When would it make sense to set up an LLC?

If you are able to buy the property in cash I would purchase in an LLC.

If you are able to get a commercial loan on the property I would purchase in an LLC.

If you are able to use private financing and do not plan on refinancing out to a residential mortgage later I would purchase in an LLC.

If you can't put the property under a LLC, then what entity can you use to maximize the type of deductions? Do we need to file as self employed?

@Dominic Greeley It generally doesn't matter LLC vs holding property in your personal name for tax returns, it will all be put on Sch E on your return. The Sch E deductions are numerous, generally anything associated with the property: repairs, property management, attorney fees, property taxes, to name a few. You'll also get a depreciation write off above the actual cash expenses related to the property.

@Tom S. Thank you. 

When you all first started, did you pay for a cpa to handle these taxes?

@Dominic Greeley   Yes, definitely.  About $150 per property per year for tax return prep (for me).  The first year is always more, as you have closing costs, maybe rehab to get the place ready, and you also have to split the value of the property between land and building.  The building part gets depreciated.

- Tom

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