Buy my first property on LLC or Personal ? Loan issues?

Question

Hello everyone.

I found out about bigger pockets a few weeks ago and I am addicted to the podcasts! So informational! Thanks Josh and Brandon for all this :)

On to my question:

I am a first time real estate investor - kind of recent post-grad (4 years out) and paid off all my loans and finally saving some money.

I am working with my brother-in-law to get into buy and hold properties. However, we have seem to be getting some conflicting information regarding how to buy first property.

The agent he was just asking, for advice, said it's better to put the first property on one of our names because of the better loan rates. However, we already incorporated an LLC and I am inclined to put the property on there? Are interest rates really that different?

We aren't going for huge properties either. Something along the lines of 50k-100k for our first property and we would put 20% down. We all have great credit 790+, and no debt in our names.

Wanted to get some advice from seasoned veterans on here :) Really appreciate everyones help. Thank you.

Joe Impagliazzo · Answer

@Ravi Patel

If you do purchase the home under the LLC, and later you want to cash out with conventional loan you can switch the deed to your personal name at closing, and finance 75% of the appraised value as long as you were an owner of the LLC when the home was bought.

Kimberly H. · Answer

There are lots of threads about this on this site, you can search the "search this site" on the upper right.

Keith Anderson · Answer

Usually all members of LLC with more than 20% ownership have to submit docs for LOI. Bank Alternate programs are fairly painless if one of LLC members is a weak link credit wise.

Eric Nguyen · Answer

Unless I am mistaken, banks usually don't loan to a LLC unless it's a commercial mortgage but to be qualified for a commercial mortgage is a different story.

Jay V. · Answer

This is a hot topic on here....

Just know that if you take out the loan in your personal names and deed it to the LLC the bank COULD call your loan.  I don't know if they will or not, but they can.

Also, having a personal guarantee on a property in the LLC MIGHT pierce the corporate veil, rendering the LLC nearly useless.  Again, that is a might because I don't know exactly what will happen or if it's worth it for the accuser if you ever get sued.

Bottom line, if this is really important to you, I'd get a lawyer's opinion.

Ravi Patel · Answer

Scott,

Thanks a lot. This does help a lot. I know about the transfer fee, but wasn't sure on the tax part. Will have to look into it. We were thinking on getting first property under our names then transfer after 2/3 months to LLC so we can keep that 30 yr conventional loan option.

Going to see the difference in terms and interest in both options. If it's a half percent or something, it may be better to be protected under the LLC especially since we are renting it out.

Appreciate everyone's response!

Scott Lewis · Answer

Hi Ravi,

First congrats on the paying off the debt. Darn good feeling.

Your question has several nuances that you need to be aware off. At some point down the road after you and your brother-in-law are RE moguls, you'll want to make sure your assets are under some sort of corporate veil to protect your personal assets from a law suit.

Depending on the state, if you do not purchase the property will an LLC, you could be charged transfer and recordation taxes again when you transfer the real property to your LLC or S-Copr, C-Corp, whatever.

If you just incorporated, then your LLC has no track record, K-1s (LLC tax doc), etc to provide for a bank so you and your brother-in-law are going to have to personally guarantee the loan.

No big deal, just make sure your LLC is listed as the owner on the deed and you'll be fine. That way if a lawsuit comes in, then the LLC will be named as the defendant and not you. Just make sure you dont have too many assets in the LLC.

The loan doesnt matter so much as you'll probably be doing a cash out refi or refi'g into a 15yr at some point in time in the future, so at that point, if it makes sense, get a loan with the LLC's name on it.

Hope this helps.

Ravi Patel · Answer

Thank you for the help.

What would be your opinion on if you were in this place ? Just trying to get a feel.

Jon Holdman · Answer

The interest rates on a commercial loan for an LLC may be slightly higher than for a conventional loan.  The big difference is term.  Only conventional loans offer 30 year fixed terms.  With a commercial loan you might get 15 year fixed, but you may also have to deal with balloons or ARMS.  So, if you want 30 year fixed, owning it in your own name is the only choice.