LLC for rentals, getting financing?

Question

Hello,

I was looking through the forums about this, but nothing I saw was exactly on this topic. So, I'm sorry if this has already been covered!

I'm just starting out, and I have one SFR that has been rented for years. My taxes and funds have all been heavily mingled since I haven't had any entities. Now, I'm beginning to pursue other properties and want to establish LLCs to hold everything. I want to strictly adhere to no co-mingling of personal and business funds.

I was at a bank just chatting with a mortgage officer recently, asking about financing MFRs and the formation of LLCs. The officer said that they didn't think they would be able to finance a property that is to be held by an LLC, nor could they use the existing property as collateral if I do extricate it from my personal tax returns and move it into such an entity.

Has anyone had any experience with this/been told this? I feel like the person might not have been telling me the actual policy, but just what they assumed the policy was. They said they would investigate the matter and get back to me about it. I'm just looking for some examples that I can contemplate on for when they do get back to me.

To success!

Eamon

Chris Mason · Answer

Hi @Eamon Conheady,

I'll save you some time.

• Residential loans are for people.  
• Commercial loans are for entities and corporations (you were speaking with a typical residential loan officer, so when you asked that question it was like asking if you can buy a propeller to go with your bicycle - beep bloop beep does not compute). 
• The exception is revocable living trusts. 
• Buying a property as a human with a residential loan, and then putting title into your LLC the day after closing, can in theory trigger the due on sale clause, but rarely does the lender invoke this provided that they are still being paid on time and you aren't otherwise doing anything naughty.
• The entity obsession world is mostly charlatans trying to charge you per-entity to set all these garbage entities up. Here you are, for example, with exactly one SFR that you own, and you're already talking about establishing multiple LLCs!

Stephanie P. · Answer

Great answers from some experienced lenders and investors  Let me add something.  Dodd/Frank rules clearly delineate residential from commercial or what they call "business purpose" loans.  Because we only do business purpose loans we actually require our borrowers to be entities. They can have multiple properties in the entity but we only lend to entities.

Also, the LLC offers no protection if you aren't strict about comingling funds and treat the entity like a business.  I'm not an attorney so take it for what it's worth

Michael Henry · Answer

Eamon at 5+ properties things get more difficult. But that is a good problem to have since you've been making deals.

Thanks,

MH

John Clark · Answer

Hi @Eamon Conheady,

I have two LLC's for my properties with no co-mingling of funds.  And I ran into the same thing with lenders, not to a LLC.  So I did what @Chris Mason suggested, transferred to LLC.  But I did it after a few months just to show the banks that payments are being made ahead of time.  (just in case)

Also as you said, 5+ units require a commercial loan.  And that is an entirely different ballgame.

Good luck to you.

Eamon Conheady · Answer

@Chris Mason

Thanks for the detailed reply!

The reason I am interested in the LLC formation is simply for the protection against liability. I'm not 100% certain as to when or if I will do it, as I am still learning more about them. The multiple LLC seems to be a way to isolate holdings by state. I'm not quite at the point where I'd need to do that, since I only have one property at this time. It would just be to set the stage for the next purchase.

I don't want to buy the properties as a person just to transfer into an LLC, since like you said, that gets complicated. My goal is to keep the financial streams as isolated from my personal finances as possible.

What I am wondering is if I can transfer my property into an LLC and then leverage it for the next property. Although my plan is to purchase a four-plex, which classifies for personal residence loans. Future plans include larger MFRs.

Would it be wise to hold off on moving holdings into an LLC until I am investing in units large enough to be eligible for commercial loans in their own right (like 5+ unit MFRs)? If so, would it be better to increase liability insurance to keep safe from suits? I do always carry more than the necessary limits.

Thank you for your guidance!

Best, Eamon

Eamon Conheady · Answer

@Stephanie Potter That is an excellent rationale, thank you! I was wondering if there were businesses out there that did this type of lending. I don't like the thought of skirting the rules by either hoping that I don't trigger the due sale clause. From everyone I've talked to in person about the LLCs, the most important aspect of maintaining the integrity of the entity is to keep it completely separate from my own finances. It's a business, not my personal piggy bank. What types of property do you lend for?

@Mark Walker Thanks for the tip about the portfolio lending. I've been curious about how to discuss that point with a lender. I'm reading up on lots of different real estate topics right now to bring myself up to speed, so that is an area I will definitely explore soon. If possible, I'd like to keep the transactions all isolated from my personal finances and maintain everything through the LLC, that seems wise, thank you.

@John Clark That definitely sounds like the best way to do it if you're buying it as an individual then transferring to the entity. I like that the money keeps coming from the same place then.

Account Closed Absolutely, 100% agree with you. You can never be completely certain that you're bases are all covered. I would absolutely plan on insuring the property. Insurance is very wise indeed. Thank you for bringing up that fact. Do you know if it would be better to insure a property, or is it possible to insure an entity that holds multiple properties in the state which the LLC exists?

LLC for rentals, getting financing?

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