What is the best way to fund an LLC to buy a rental property?

Question

My wife and I have created an LLC and are wondering what is the best way to raise capital to buy our 1st rental property?

Should we get a HELOC out of our primary residence which we have owned for a little over a year when we can or is there a better way?

Aaron W. · Answer

@Gregory Cannan A HELOC is a very popular way to fund your real estate as it is flexible, allowing you to take out fund when needed. Do you plan to use the HELOC for the down payment or paying all cash for properties?

Keep in mind, with an LLC you will be applying for commercial financing when you purchase rental property. The terms and rates are different than when purchasing in your personal name. When you analyze the properties, you will want to keep that in mind and adjust accordingly.

If you are just starting out, it is still possible to purchase rental property in your own name to qualify for the more favorable rates. Many who do this will also purchase an umbrella policy for liability protection.

Best of luck!

Nicole W. · Answer

@Gregory Cannan Hi. I didn't put any properties into LLCs for years as they were so encumbered there was not reason to. I just always insured them and have a commercial umbrella. But, you did start one and that is fine too! Yes, you just keep the receipts as such for a paper trail for your accountant. But there is nothing wrong with starting with one either. One issue I had with an LLC is that the bank wants MY name on the loan as the LLC has no credit. Then it is in the mortgage contract that you can't change it into an LLC. Someone else who has financed through their LLC may have better advice on that part. My first purchase was with borrowed $ from a family member who had their $ in stocks/bonds. We just asked to borrow it and paid more interest than they were getting. Then I bought 8 properties by refi-ing my primary residence and putting 5% down on all those. This had me too indebted and it is better to maybe start with 3 at once doing it that way. Haha. I was over enthusiastic. I still have 3 out of those. I sold the rest and just moved along. I have since just 1031 exchanged property and bought more. You are on the right track. Real estate has been the best investing I have ever done. I now live off the cash flow. Just keep at it. Buy a property and just ensure you have all your margins worked out for taxes, insurance, maintenance, vacancies, utilities when empty, etc. Ensure you have an extra margin there if taxes and insur goes up. I have just bought and held for long periods.

Nicole W. · Answer

@Gregory Cannan I'm older. Haha. I started over 26 yrs ago and used to be able to do that.

Gregory Cannan · Answer

@Nicole W.

Thank you for your correspondence! So since we are just starting out will I just leave our LLC formed but continue with personal loans as much as possible. How were you able to put only 5% down on investment properties?

Dave E. · Answer

@Gregory Cannan

If you are planning on doing a conventional loan with some like 20% or 24% down you will have to do that in your personal name. Most banks won’t do a standard “residential” loan to an LLC, and a single family rental is too small for a “commercial” loan.

Once you buy the property in your personal name you can transfer the title to your LLC, but there are some hoops to jump through to do it correctly and legally. Search for “due on sale clause”.

Best of luck to you!!

Gregory Cannan · Answer

@Nicole W. Hi Nicole, yes we set up a checking account but we opened it with a tiny amount of CASH. How do we make sure that initial deposit is paper trailed? Just keep the receipt of the transaction and write member contribution on it? We may have jumped the gun on forming the LLC as we are just starting out and it sounds like we ought to level up as much as possible through personal loan rates and then purchase through commercial terms after our personal loan ability is maximized.

Does that sound accurate?

Gregory Cannan · Answer

@Stephanie P. Thank you for helping us out. We're going to figure out which properties and how many we will be able to personally purchase. Thank you all for your help.

Nicole W. · Answer

I originally use funds from my primary residence to fund my rentals. You can contribute cash to your LLC but just keep the paper trail. You need to keep your LLC funds for your property only. I am sure you set up an LLC checking etc for it.

Gregory Cannan · Answer

@AJ H. Thank you for your response. It will help guide my decision making for sure.

Stephanie P. · Answer

If you're using a HELOC and an LLC, make sure the money is a loan to the LLC so you don't co-mingle funds.  Otherwise, just do the loans for the first 10 or 20 properties (depending on how you do your taxes) under your name and then your wife's (or vice versa).  That way you can use conventional financing which is a lot less expensive than commercial.

Stephanie

What is the best way to fund an LLC to buy a rental property?

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