Some Questions on Private Lending and my First Deal

[Jorge Siverio]

Greetings BP Community!

I am an aspiring Real Estate Investor and searching for my first deal. The forums have been extremely helpful so far in helping me get started on my research. However, I still have some outstanding questions that I was looking for some help on.

I would like to implement the BRRRR strategy to buy, rehab and hold. I am thinking of funding my first deal with a HELOC for the down payment and then private or hard money for the purchase price and rehab.

1. I talked to Lending One today and they said that I needed to form an LLC or private money lenders would not lend me any funds. Was this statement true? ...or do some private money and hard money lenders lend out to individuals and not LLCs

2. If I do use an LLC, would I be able to refinance after the 6 month seasoning period with a conventional cash out refinance, or do LLCs not qualify for these?

3. If I have to use a an LLC, and I then proceed to refinance with a private lender, what type of qualifications would they need. Assuming this is a new LLC and I go to refinance in 6-7 months... would they need to see a specific amount of income. Any resources you all can point me to would be appreciated.

Many thanks - JS

[Owen Dashner]

Jorge,

Congrats on getting started. Some thoughts on your questions below (context: I am a partner in a hard money lending business).

1. Let's first make the distinction between hard money lending and private lending. Hard money is a loan on the underlying asset. Most HML's are going to only be able to loan to LLC's or corps due to the Dodd-Frank legislation requirements on consumer loans. Private money can come from any individual, typically friends and family when you are getting started. Private money could be unsecured by the asset (i.e. you could borrow the money from your mom or grandpa, best friend, etc.) in the form of a promissory note, or it could be tied to the property itself with a deed of trust or mortgage. Private money can be loaned to an individual or an LLC/Corp, but keep Dodd-Frank in mind.

2. Conventional 30 years financing is most commonly issued to individuals, not LLC's.  If you quit claim the property from your LLC to yourself, it may be a taxable event - so be sure to consult your tax pro before doing anything.  Also be aware that the original lender (hard money or private) will likely not be a fan of you using a quit claim while you have a loan out (in my business, we do not allow this).  They likely will have language in your loan docs that specifies what the consequences could be if transferring the title to another entity or yourself while the original loan is still outstanding.  You could have the loan called due. Private money lenders (especially friends/family) may be more flexible on this stance than a HML.

3. This is going to vary widely from lender to lender.  As I mentioned above, friends and family are common private money sources and will likely be more flexible with terms than an institutional lender.  The easiest way to do what you are describing is to use an LLC to buy the property, finish your rehab, then refinance out of the hard money loan into a commercial loan using the same LLC with a commercial lender (or private lender if you have access to one). Pros - A lot less paperwork and headaches with commercial loans vs conventional loans, plus faster decisions and processing times. Cons - typically shorter amortization period, higher interest rates, and shorter periods of fixed interest before ballooning.

Hope some of this helps.  Feel free to DM me if any questions.

Good luck!

Owen