All Forum Posts by: Avery Moore

Avery,

Congratulations on getting your portfolio to where it is! Starting out using conventional financing can be helpful, but at some point DTI certainly takes a toll and its good to pivot to that DSCR type financing.

I am hearing of more banks offering 'DSCR' loans, but from what I've seen there are still some elements of conventional financing that take place during the underwriting and processing of them. True DSCR loans won't cap you or limit you based on your Debt-to-Income because they recognize that the debt that the property incurs (P&I, taxes, insurance, etc.) can be covered by monthly rent and if you can find properties that 'pay for themselves' then they will lend you the money to find more and more.

Some DSCR programs will even alleviate on your personal credit and only require soft-pulls. It feels like it would be a perfect next step for you in your investment journey.

Happy to connect and see how we might be able to help!

Good luck

@Avery Moore

Hi Avery,

Here’s what we did…

We went to a local bank and did a DSCR loan with a cash out component as well that combined five older mortgages that at the time were at higher interest rates than what the DSCR lender was charging. Loans were from 2018-2019 in the 5% to low 6% range. The DSCR lender was offering 4.1%… back when conventional residential loans were in the 3's.

So because the bank holds its commercial (DSCR) loans, all 5 of those properties came off our Fannie Mae count and opened up 5 more spots for us. Obviously the interest rate situation has changed since then… But the method probably still applies in general.

But, keep in mind that the DSCR loans usually reset every five years and that is what happened to us. We went from 4.1% to 6.2% this year on that loan… So there are trade-offs to consider.

Otherwise, my best advice is to put each property in one person‘s name if you happen to be married. That gives you 10 slots for each of you.  If you didn’t do that, you’re probably saying “well now you tell me!” lol!  But that helped us too.

Hope it helps!

Randy 

Hey!

Congrats on expanding your rental portfolio! To address your questions:

1.Purchasing with an LLC: Yes, you can buy properties under your LLC. However, financing can be different from the conventional route. Traditional loans (like FHA) are for individuals, not LLCs, so you'd typically need a commercial or portfolio loan when buying through your LLC. These loans usually consider the property's cash flow more than your personal income/credit.

2.Switching to an LLC: Transferring your property into your LLC can offer asset protection, but it won't necessarily make it easier to get future properties unless you're using LLC-friendly financing. Keep in mind that transferring the property could trigger a due-on-sale clause from your current lender, so you'll want to check the details of your loan before making the switch.

Hope this helps!

For a commercial loan at 7% over 15 years, you can use an online loan calculator to estimate your monthly payments. A good option is Bankrate’s Loan Calculator. Just input the loan amount, interest rate, and term to clearly understand your costs. Remember, while these loans are based on potential income from the property, your employment and personal income will still be factors in the lender's decision.

Regarding switching the property to an LLC for liability protection, a quitclaim deed can transfer ownership, but it's important to check with your mortgage company first. They may have specific requirements for such a transfer to ensure you comply with your loan agreement.

If you have any more questions, feel free to ask!

Putting property under an LLC complicates matters. It doesn't provide as much protection as most people think, it's not as easy as they think, protection isn't as necessary as you think, and it may actually hurt you by complicating your life.

An LLC is useful for two things: anonymity and legal protection. In most cases, neither is warranted.

Warning: I am not an attorney, and this can be a complicated topic. Please note the information provided below is a layman's definition designed to provide a basic understanding for the general audience. You should consult an attorney or CPA for your specific situation.

ANONYMITY: When you create the LLC, your name is recorded on the documents and published on the Secretary of State's website for all to see. So you're not completely anonymous. If you want to be completely anonymous, you can use a Registered Agent. The Registered Agent will record the documents on your behalf so only their name and information appear on the documents. I've done this with my properties because I'm well known in my small town and don't want people to know what I own.

LEGAL PROTECTION: By placing your assets in an LLC, you are legally separating them from your personal assets. If someone injures themselves and sues, they will be suing the LLC and not you personally. If your insurance coverage isn't enough, they could seize the LLC assets, but not your personal assets.

Additional thoughts:

1. An LLC is not free. You can spend as little as $100 to form an LLC, or you could use an attorney and spend $1,000 or more. There are also additional costs of operating and maintaining an LLC, like separate bank accounts, annual report filings, tax filings, etc.

2. There are rules to follow! If you fail to follow the rules, you may open your personal assets to a lawsuit. An example of this would be mixing your personal money and LLC money in the same bank account.

3. You do not need a separate LLC for each property or a series LLC! Don't make your life more complicated than it has to be. Most professionals will recommend a separate LLC for every $1 million in assets but I don't think that's necessary. In my case, I have residential rentals in one LLC, commercial properties in another, self storage in a third, and my real estate company operates in a fourth. Some have more than $1 million in equity while others have less.

4. The need for an LLC is grossly exaggerated on BiggerPockets and other websites. Have you ever heard of a Landlord being sued by a Tenant and losing property? I've been on this board since 2010 and haven't found an example yet. You've probably heard of big Landlords losing property, but only because they were flagrantly violating Fair Housing, running a slum, or otherwise violating the law in an egregious manner. You are more likely to be struck by lightning twice. The vast majority of lawsuits against Landlords are for wrongful eviction, security deposit disputes, and Fair Housing Violations. Your primary insurance policy with $300,000 in liability coverage should be sufficient in 99.999% of all lawsuits.

5. The best protection for you and your investments? Know and obey the law. I manage around 400 rentals with 14 years of experience and have never been sued once. Even if I were sued, I document everything and obey the law, so I won't be found guilty. Even if I were found guilty, the cost would be in the thousands, not in the millions. Insurance would cover it, I would pay the deductible, and no assets would be lost.

If you are in an area like San Diego where people are more likely to sue, a judge is more likely to find you guilty, and the payout is expected to be higher, you may consider an umbrella insurance policy. This policy will provide additional coverage above what your existing policy covers. It's easy to obtain, costs very little, and doesn't require extra, on-going effort to maintain.

Hi Avery. I would HIGHLY recommend acquiring all future properties under your LLC or business to protect your personal assets. It will also make year end accounting and reconciliation so much easier and showing your assets vs liabilities for future lenders - whether traditional or hard money.

Great questions! Let me break them down for you:

Purchasing a Property through Your LLC:
Yes, you can definitely purchase properties under your LLC, and it's actually a common strategy for investors looking to grow their portfolio. The key difference is that when buying as an LLC, you won't typically qualify for traditional FHA or conventional mortgages. Instead, you'd likely look at commercial loans or portfolio loans. These loans are based more on the property's income potential rather than your personal financials, though your personal credit might still play a role, especially if your LLC is newer. Keep in mind that these loans can come with slightly higher interest rates and shorter terms, but they do allow you to keep your investment separate from your personal finances.

Switching the Property to Your LLC:
Transferring the property to your LLC can be beneficial for a couple of reasons. First, it offers liability protection—keeping your personal assets separate from your business assets. Second, it can help when it comes to future investments, as building a strong rental portfolio under your LLC can make it easier to secure loans for future purchases. However, before making the switch, it’s important to check with your current lender. Transferring a property with an existing mortgage to your LLC can sometimes trigger a “due-on-sale” clause, which could require you to pay off the loan immediately.

If you're thinking about expanding your rental portfolio, switching to an LLC could give you more flexibility and protection as you grow. If you want more personalized advice or help managing your properties, feel free to reach out—we'd love to help!