All Forum Posts by: Dan N.

Quote from @Dan N.:

Just got off the phone with a lender that was interviewed recently on Dave Meyers' podcast.

Had some of the best terms I have come across so far for DSCR loans.

BUT

They DO NOT allow you to do ANY renovations (maximum paint) to the property, even if you finance the renovations with your own funds (as opposed to adding it to the loan).

Is this normal?

Not entirely accurate. DSCR Loans are almost exclusively going to be 30-year loans so obviously it wouldn't make sense to restrict against any renovations for a property over a 30 year period!

The vast majority of the requirements occur pre-close in the underwriting stage - the requirement is to not need renovations "at origination" - this is determined in the appraisal and generally can't exceed anything more than $2,000 in needed maintenance.  After that, as long as you don't occupy the property, there should be no issues in renovating or adding to the property with your own funds

Hi @Dan N.

DSCR loans don't lend you rehab money whatsoever and the properties have to be in rent ready condition. To be specific, most guidelines call for the property to be in C4 condition with no issues with the 4 major components: roof, HVAC, electrical, and plumbing.

I have done 100s of DSCR loans on the lending side and as far as a lender preventing you from doing rehab after you have closed, I've never heard of that. How would they even know? They are selling the note to Wall-Street within 30 days and they aren't policing the houses. If you tell them you are intending to knock down walls or do major rehab, then of course they would probably just steer clear of financing the deal. If you need any advice, feel free to reach out.

Quote from @Dan N.:

I am confused on this topic and I would like some input. I am going to acquire a few long-term rentals over the next few years. All properties will be acquired with a mortgage. Initially, I was sure I was going to create an LLC (for legal protection) for each.

But over the past few weeks, I have discovered:

1. LLCs that are owned by one person don´t really provide any protection

2. Umbrella insurance seems to cover you and your assets better than an LLC in case of a lawsuit.

3. If I buy a house under my name, and transfer it to an LLC owned by me, there is a slight chance it could trigger a due-on-sale clause (especially if interest rates rise).

What am I missing? Why do so many people purchase long-term rentals (with a mortgage) under an LLC?

Thanks in advance for your feedback.

Lack of knowledge Dan, Lack-of-knowledge. And, BS "books" or "Guru's" telling have truths. 

Here is the little spoken truth, a person only needs 2 entities, that's it that's all, 2. 

One that own the assets (a), the other who monetizes it (b). 

Entity (a) LEASES said asset on NNN lease with sublet right's unto entity (b). Entity (b) is the public facing entity who leases properties unto the public at large, and "eats" all that liability. Because if/wehn anyone want's to come after entity (b) to sue for, well anything, entity (b) is POOR. Entity (b) own NOTHING, so nothing can be attached, can it? it's only assets are operational, and seeing as it has a lease to pay with entity (a) it's really not all that much profit, it actually makes a very meager profit. Because entity (a) is also an at-profit entity. So entity (b) has little to nothing to be sued for and even if/when it does happen, get's put out of business, oh-well I guess it's time for entity (a) to find a new "customer" to lease the properties to on a NNN basis to operate at again.

It's called the asset island method. 

And no, not 1 of my HNW clients and contacts operates a list of entities, it's 2-3. 

Quote from @Frank Chin:

Quote from @Dan N.:

Quote from @David M.:

@Dan N.

Sorry, that doesn't make sense. If paying for the LLC is the least of your concerns, then the Due on Sale clause is a moot point. The LLC would have its own mortgage, and you can afford it. What refinancing issue would you have?

Out of curiousity, what sort of legal/legislation do you focus on?  I ask since I just noticed you are marked as the "#1 Legal & Legislation Contributor" on the Board right now.

In addition, my issue is that it seems that even if I do get an LLC and follow the guidelines of separation etc, it still doesn´t completely protect me/my assets.

 Dan:

Agree with you here. I bought a business from someone thru an LLC. He business was in an S Corp, sued for $3 million dollars, but only insured for $1 million. Most importantly he was not added as an additional insured under the S Corp which he should have. When I heard that, called my insurance agent and she assured me that she added me as an additional insured under the LLC so this wouldn't happen.

A customer of my business staged a slip and fall, witnessed by my employees, and wanted several thousand dollars to go away. Spoke with my insurance agent who suggested I file a claim even though I was at first reluctant as it would run my premiums up. What happened? The customer got a lawyer, so I had him contact the insurance company. Eight months later, the customer came back complaining his lawyer was not returning his calls. Even though it's not my problem, I called the insurance company claims department who advised they got 3 threatening letters and phone calls from the lawyer who most likely work on a contingency basis, and that's all he'll do in these cases and drop the matter. They just filed the letters. I got back to the customer that I originally agreed to pay the cost of a doctor's visit, but since he decided to go with a lawyer, told him he's stuck dealing with the insurance company. He's looking for $10,000.

Funny thing is, he continued patronizing my business. Some people have no shame. Bottom line is, for me, an LLC did not help me in this case, but the insurance company provided the shield and did all the work. Since then, I spoke to local attorneys who advised me they normally sue the actual owners personally for negligence anyway, so LLC or not does not matter.

I don't have my rentals in LLC's. I placed the business in an LLC for financial, tax, insurance issues and reasons, not as a shield.

I also wanted to add if that you bought your Investment with your Personal Name and used a Personal Mortgage, then transferred the title to an LLC but left the Mortgage exactly the way it is where you are personally liable for the Mortgage, it would seem that any competent Lawyer will pierce the LLC by claiming that the Investment property is just an Alter Ego of the Actual Owners because it pays an Mortgage that has been personally guaranteed by the actual Owner.

Not only that, it can even be seen as Comingling funds as Company Funds pays a personal debt.

I don't know the statistics, but I would love to see if there is any cases in which a Lawsuit of this nature was successfully defended in this way.

To me, that's the only way I would rely on an LLC for Liability protection if I hold the Mortgage in my Personal name.

Whatever way you think, the Business Owners Policy is your shield, NOT the LLC.

Quote from @Dan N.:

Great answer. Yes, if it was a DSCR loan, it would make complete sense. But I am lucky to qualify for a conventional loan, which seems to complicate things with the LLC.

Absolutely plan to get all possible insurance.

Hey Dan
We may be beating a dead horse here, but there are a couple of things you may need clarified.
Transferring to an LLC that you're a sole member is an exempt transfer, so allowable, and shouldn't trigger the due on sale clause.  Here's the servicing language from Fannie Mae. https://servicing-guide.fannie...
You should always exhaust your conventional options before considering a DSCR loan, so get the conventional financing in place and then put it in an LLC if you want after you've owned it for the requisite time period.
Having said that, it's difficult to protect your assets in an sole member LLC.  A good lawyer will generally be able to "pierce the corporate veil".  If you get a loan, for instance, and guarantee it personally, you've encumbered yourself.  Here's a good article for your review.
https://www.upcounsel.com/who-is-liable-in-an-llc#:~:text=Similar%20to%20a%20corporation%2C%20the,of%20the%20owners%20are%20protected.
I've been lending for a long time.  I'm in the camp of buy using conventional financing until you can't and then go DSCR if the numbers work.  Buy in your personal name because the cost of financing is higher and the risk isn't necessarily mitigated with an LLC.  
One girl's opinion.
All the best
Stephanie

Most DSCR lenders don't require an LLC anymore.

@Dan N.

Sorry, that doesn't make sense. If paying for the LLC is the least of your concerns, then the Due on Sale clause is a moot point. The LLC would have its own mortgage, and you can afford it. What refinancing issue would you have?

Out of curiousity, what sort of legal/legislation do you focus on?  I ask since I just noticed you are marked as the "#1 Legal & Legislation Contributor" on the Board right now.