Raising capital in or out of LLC?

[Brian E.]

So I'm looking to buy my first buy and hold property in the near term here in the Kalamazoo area. I've read quite a few posts and lots of advice around the pros and cons of holding properties in an LLC. I do plan to talk to an attorney regarding the liability aspects of this, but I was wondering if the decision to buy and hold properties in an LLC would affect my ability to get loans from banks.

In my market I can afford to pay cash for my first property, and subsequently leverage equity in it to buy additional properties. (HELOC style) Conversely, I could also finance the first few properties and stretch my initial seed cash out a bit farther.

Any advice on the best path to take for funding the first few properties? Will buying in or out of an LLC make a difference in ability to raise capital?

Thanks,

Brian

[Josh Bloomquist]

Brian,

I'm relatively new to REI myself (1 property currently), but my CPA told me that most banks will not write a mortgage with your LLC because more than likely it has no credit history. So I went with the idea that I would purchase the property and then do a QC deed to move it to my LLC. My attorney advised me to get a letter from the lender allowing me to make that move....they wouldn't. And I've found out since that most lenders don't allow the move to an LLC through a QC deed because it technically invokes the "due on sale clause" and they COULD demand the balance of the mortgage. A lot of investors still move their properties to an LLC with a QC deed, but it's one of those things where they're just gambling that the lender won't check it and invoke the DOS clause. Though I think that's reasonable, I've decided to keep my property in my name and I've purchased an umbrella insurance policy to protect me from a liability standpoint. As I get more properties I will probably begin moving them to my LLC.

I'm obviously no expert on LLC's, but to my understanding the LLC doesn't get you any extra tax incentives, but it is a way to shelter yourself from a liability standpoint. I think it's more about how scaled up you are though.

On another note, I'd love to meet up over coffee or something sometime to discuss goals and compare notes. I'm trying to build an REI network in the area to learn more about the market trends.