Which business entity is right for me?

Question

I work for a multifamily real estate investment firm out of New York as an acquisitions analyst, and from my experience/research I feel that I have a strong grasp on the analysis and how to identify target markets. I am now at a point where I would like to build my own portfolio despite having little capital of my own to contribute (I have been aggressively paying down my student debt over the years). I have reached out to family and friends to contribute capital and have been successful in getting them on board for my first project.

For my first deal I am targeting a duplex in Texas in the $150,000 - $200,000 range. I would like to secure a conventional mortgage for the deal to cover 80% of the purchase price and finance $50,000+ for the 20% down payment and rehab using 10% of my own capital ($5,000 or so) and the remaining from family/friends. I have an excellent credit score and believe that I personally would be approved for an acquisition of this size. Originally I had thought I would create an LLC and sign for the loan personally so that I would be the general partner and the other investors would be limited partners, I would also be able to set up an operating agreement that would define how cash flows are paid to the investors (as the GP I would get a promote over a preferred return for assuming the risk and managing the deal). However, from the research I have done it seems that banks do not provide conventional financing for newly created LLC's, also if I were to create an LLC I am uncertain as to whether it would have to be in my home state of New York, Texas, or both.

Given my situation, which business entity should I use, which state(s) should I register in, and how will I be able to accept funds and pay distributions out of this entity?

Scott Smith · Answer

hey @Thomas Manglaviti you should look into the Series LLC since you can form it in Texas and use it anywhere (it compartmentalizes your liability for each asset). Article I wrote on it here. If you combine that with a Land Trust you have the maximum protection from liability with anonymity.

Basit Siddiqi · Answer

@Thomas ManglavitiYou need to look for a portfolio loan if you are looking for financing to an LLC. However, the Portfolio lender will look at items such as track record of LLC, Track record of member-manager of LLC, credit profile of all member-managers and the quality of the deal.I think you should get your feet wet and buy a personal property in your own name and focus on investors after at least a year of personal investing.Investing with other people's money adds another layer of complexity.You need a connection with an attorney to draft up an operating agreement, form an entity with limited liability, etc. You also have to provide the investors confidence that you will not blow their money.

Thomas Manglaviti · Answer

Raul, when you formed an LLC in another state did you also have to register as a foreign entity?

Also, if it’s true that banks do not generally provide financing for LLC’s what other options would I have to secure the conventional mortgage while also being able to use money provided by investors and set up an agreement to define profit distributions?

Raul R. · Answer

From what I've read, and my Closing attorney confirmed forming LLC in state you are doing business in is whats recommended.

You are correct with your research, in general Banks dont like providing conventional financing to LLCS (newly formed or established). I did a Cash out Refinance last year, bought Property under my LLC all cash and went it came time to do Cash Out REF had difficulty finding Finance, I eventually found but because of LLC paid a higher Interest Rate.. If you're looking for asset protection look into Umbrella Insurance.