Using an LLC to acquire RE when the LLC has no credit history?

Question

Hello fellow investors, my question today relates to the use of an LLC for beginner investors. I understand the value of using an LLC to protect myself from personal liability, but here is what I am struggling to get straight.

• If I setup an LLC I still have to use my personal finance to secure a loan, and most lenders will not allow you to transfer the asset into the LLC or at least this is what I have heard. Can anyone help explain how they have got around this issue and how newbie investors could use an LLC to acquire RE when the LLC has no credit history?
• Some of the advantages of setting up an LLC like say tax advantages of doing a Nevada LLC vs. CA LLC also seem to be lost because the TAX liability is determined by the state in which you acquire the property and not where the LLC is setup. I live in CA so the state of CA will want their piece of the pie even if I setup in Nevada. Hence my struggle to understand if all the advantages written about are really accurate?

Thom MacFarlane · Answer

If you purchasing 1-4 unit properties and you want a lender's best rate than you will need to finance in your names individually.  Fannie Mae & Freddie Mac are promoters of home ownership and  though they will finance up to 10 residential properties for an investor they WILL NOT finance LLCs. Thus you you need to get get financing in your name. You can transfer the property into your LLC after closing the loan without invoking the "due on sale" provided those signing the loan docs are the 100% owners on the LLC.

Christopher Phillips · Answer

@Louis Van Der Westhuizen

LLC is just something on paper until you feed it with cash or property.

If you buy something in your personal name with a mortgage and then try to transfer it, it technically will trigger the due on sale clause. they won't always do it, but the risk is there.

Fannie Mae and Hud will not lend to corporations, so you can't buy a property directly with an LLC using their loan products. You can get a commercial loan, hard money, or private lender loan with an LLC. Of course, you can put cash into an LLC.

Rental properties are pass throughs to your personal income taxes. It doesn't matter if you have them in an LLC.

Flips are a different animal and you would need to speak with your tax professional about the best way to deal with flips.

Katie L. · Answer

@Louis Van Der Westhuizen

There are several considerations that can go into the analysis of whether you need an LLC or whether a large insurance policy will suffice. Will depend on several factors like the type of property, type of tenants, your risk tolerance, other assets you own, your estate planning, laws where the property is located, etc.

Any lawsuits would be limited to the assets of the LLC and not your personal assets (assuming you run the LLC appropriately and the corporate veil is not pierced). But, an LLC will not limit you from liability in total. You can still lose your investment in the LLC. If you're going the umbrella insurance route, make sure it will cover you for several things including the routine slip and fall (but other things like mold or earthquake). You'll also want to ensure you have a good property manager to look after the upkeep of the property if you are not there to notice anything deteriorating or which may need attention.

Creating an LLC in California would cost you a minimum tax of $800 every year. You would have ongoing filing requirements with the State and would need to keep business records and documentation. If you create an LLC, you will need a business account.  As you say, CA will collect its $800 tax no matter what state you form in, so long as you are managing it from CA.

You also want to look at whether a pass-through entity helps your bottom line and your taxes. There is a new 20% pass through deduction you may qualify for that could help you, but not everyone qualifies. You should still be able to get this even if the properties are not in an LLC, if you qualify.

As for the lending, it is very difficult to get a loan to an LLC.  Not impossible, but difficult.  You may find a smaller bank willing to do it, or some banks will allow you to take the loan in the name of the LLC so long as you provide a personal guaranty.

These are all things you will want to discuss with your attorney and CPA. If you need references for either of them in San Diego, let me know.  I also have lenders I can put you in touch with if you need.

*This post does not create an attorney-client or CPA-Client relationship.The information contained in this post is not to be relied upon. Readers should seek professional advice.

Ron Healy · Answer

My wife and I found a small community bank that was willing to finance the purchase of SFR's through our LLC.  These are commercial mortgages so the terms are fixed for only 5 years and interest charges are a bit higher.  Even though the LLC is the owner of the properties, I am the guarantor of the loans (ie. my personal income, debt level, etc. are factored into whether the LLC will qualify for a new loan).  We are now at the point where the company is profitable and has a low debt to value ratio, but any new mortgages will still have to be guaranteed by me.  Once we get to a certain size we'll probably start looking at other options.

Thom MacFarlane · Answer

@ Louis Van Der Westhuizen  regarding “Your response also gives me hope, but I have a question. If I am holding the loan, and then transfer the property into the LLC but still hold the loan, then don't I lose the protection (anonymity) because the property is still in my personal name from a financial liability perspective? The corporate veil is not so much a veil at that point right?”

Sorry about tardy response – you would do the loan in individual(s) name (to get best terms) but would later put title in the name of the LLC. If someone runs a title search or looks up the property then they see the LLC which is your intent to be semi-anonymous. Delve a little further, like most pros would do, and we’d see the loan and individual’s name and easily locate the underlying owner by seeing that loan history. However it is also easy in California to find the owner of an LLC , that hasn't been traced by having a loan in an individual name,  since an LLC needs to filed in the state of California. The filer, signer of the LLC, is usually the president, General Partner or managing partner (all alt names for owner) and easy to find.

In my opinion, unless layering ownership with LLC owning an LLC, being anonymous is overrated. Its tax benefits and liability protection is priority 1 & 2.

Scott Smith · Answer

@Louis Van Der Westhuizen - Many of my clients buy in their own names to securing financing, then use a land trust to secure the asset. From there it can be left in the trust or incorporated into a trust/Series LLC structure easily, depending on your needs. I've written about this subject before here in this BP article.You're correct. LLC law is dictated at the state level. As a Cali investor, you have unique concerns. Are you aware of the Delaware Statutory Trust? That would be an asset protection option that allows you to have a way around paying CA's notoriously burdensome $800 franchise tax. There are several threads about the DST here on BP, but it functions similarly to a Series LLC and is viewed as an estate planning tool, therefore not subject to the tax.

Tiffani T. · Answer

Speaking of creating an LLC, I recently opened an LLC here in WA state then came to realize the investors of ALL of my properties happened to be Fannie Mae and Macs. Banks do not allow me to add these into my LLC.  Since I already have an LLC with the legal formation documentation, does it matter that there are no properties attached under my LLC? I figure it is better if I just leave that open for now versus filing for withdrawal (?) since I have plans to purchase more properties.

Louis Van Der Westhuizen · Answer

@Mai Vo thanks for your input Mai, interesting stuff. Sounds like you have things in order.

Pete Tam · Answer

My question on the following scenario -

I have a property on my name . My brother and I are parner on one of the LLC. Can I put that property under this LLC ?

Using an LLC to acquire RE when the LLC has no credit history?

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