cash purchase in LLC, then seek financing?

Question

Hello all

I recently had a conversation with a co-worker who had just formed a 3 man LLC and financed their first purchase. Their largest challenge thus far was obtaining financing - so much so they hired a broker to help them secure loan (for a nice sized fee).  If one had access to cash reserves from a family member, would it be possible to make a cash purchase using the LLC (assume the LLC was funded in the correct manner) then obtain financing on the property? Or do we end up in the same boat - obtaining financing for an entity with no track record and all the same issues?

Thanks in advance!

Account Closed · Answer

It's always easier to refinance an existing property than it is to find financing for a new purchase.

That being said, your LLC will need a credit history. The best thing to do first is to have a conversation with a local or regional bank or Credit Union that understands investors. You can get a list of banks and Credit Unions from your state Finance Commission or whatever name they use in your state. Call & ask for "commercial" lending or "portfolio" lending. Ask them if they lend to LLCs for the purpose for buying investment properties and ask what their criteria is. They will provide you with the basic information and you may have to co-sign for the first one or two until your LLC establishes credit. But, let the bank or credit union make that decision. Don't offer to co-sign but if it's the only way they will do the loan, you then make a business decision of whether you care to co-sign or not.

Joe Geist · Answer

@Scott Smith great news, I’ll review and potential post my own results here.

Thanks!

Scott Smith · Answer

@Joe Geist Sure, I think there are a couple different groups out there that do similar work but I have a friend that is a member of Fund&Grow - if you just google it they should have a bunch of information on their website.  But from my understanding they work with new businesses (newly formed LLC's) and somehow help them to get unsecured business credit.  I am no expert in this area and maybe I am totally off, but people that I know that have been involved with them have only said good things so I figured it was worth mentioning.

Scott Smith · Answer

There is actually a unique strategy when it comes to purchasing homes so that you can have the protections of a LLC (which I am assuming is the reason they formed this entity in addition to having the formation documents define each members role) but allow you to obtain financing with ease vs trying to obtain financing under a LLC which is extremely difficult as you/they experienced. The best tool in this situation is the Land Trust, which is a protected entity versus the Due on Sale Clause, that can assign and an LLC as it's beneficiary and protecting the people involved. This would still mean that each partner would sign for the loan, but it is the best strategy to get the most advantageous financing options with the liability protection of an LLC.

IF the LLC is the only way that you wish to finance future purchases there are groups like Fund and Grow that can help.  Otherwise for the first two years its difficult.  You can make a cash purchase but from my experience as an investor its not going to help your LLC to gain credit for future deals.

But again, there is a way that the group should be able to work around this.  If you want to talk more about it please feel free to reply here or DM me.

Stephanie P. · Answer

@Joe Geist

Cash is always king, so the ideal scenario is to buy the property, renovate it, stabilize it and then sell it if you're flipping it or refinance it to get your cash out if you're keeping it.  There are a couple ways your new LLC can go about financing your property.

•   Go to your local bank that you hopefully have a relationship with and apply.  Bring 2 year's tax returns for everyone in the LLC, a pro forma for the property and bank statements showing a lot of cash.  This is the least expensive and most time consuming route.
• Contact a broker and have them assess your situation.  He'll put you with the right lender based on your situation. There are lots of lenders out there and using a broker is the smartest way to go.  Some lenders need reserves, some don't care.  Some lenders require personal guarantees and some don't.  Some lenders have substantial prepayment penalties and others have little one or none at all.  Your broker should know where to put your loan after the first conversation.  This is the quickest way, but will cost a little more in rate and fees.

Paying a broker a fee is not terrible.  In many ways, it's just the cost of doing business and in the long run, can save you thousands in appraisal fees to lenders that wouldn't do the loan anyway or in time wasted waiting for some underwriter to climb out of their hole to look at the tax returns of each member of your LLC.  Sometimes the speed of using a broker is the difference in actually getting a loan and losing out on substantial profit.

Stephanie

Caleb Jordan · Answer

What sort of loan and terms where your friends looking for? Was this residential or commercial property? Short term or buy and hold.

A residential property can get financed in a new LLC relatively easily if you look in a hard money/ hybred hard money space. There are tons of options for investors out there. I'm not sure about commercial/porfolio lenders though because I'm not as familiar with that world

It is possible to get a refi after you buy in cash.

Is this true cash purchase or will family member have an official note on property. If you truly own it free and clear you are looking at a cash out or delayed finacing. If family members have a note on property then you need a rate and term refi which is different than cashout and lenders will underwrite these differently. Generally a cash out is seen as higher risk.

Are you trying to get financing within a few weeks or months? Or purchase and waiting 6 months to a year? Some lenders have seasoning periods. If you want to do it sooner then delayed finacing is probably best. Longer you hold the property the more options open up for cash out loans.

Do you want to keep it in LLC or tranfer it to personal name? That will determine what sorts of lender to even look at.

Joe Geist · Answer

@Scott Smith thank you for your response. Can you please elaborate a bit on the groups “fund” and “grow” that you mentioned in your post?

Thanks

Stephanie P. · Answer

Friends and family are the best way to get started, hands down.  If they believe in  you enough to help you along your path, then I believe you will be successful in part because the money is cheaper, but also because you will have a support system and you won't want to let them down.

Contrary to popular belief, it is not very challenging to get a loan in an LLC.  It is more expensive than going the traditional conventional financing route, but some people don't qualify for conventional financing.   You may want to consider an umbrella liability policy instead of the LLC so you can get conventional financing.  There are a ton of threads on BP that debate the pros and cons of LLC vs. taking title in your name.

Joe Geist · Answer

@Stephanie P.

UPDATE....a few more details to help clarify. My father will provide me the cash (an agreed upon fee after I get financing) to purchase a SFR to hold for cash flow. I would then obtain financing and cash him out after (I have enough for down payment).

The reason I was asking about moving forward in this route was the fact that I had “heard” it was very challenging to get loans for the LLC initially. So I was curious since I have access to this capital for a very family friendly price, would this be a superior approach- cash purchase in LLC, finance out 70-75% LTV and in combo with the funds I already had for the down payment, return the lump sum back to my father and everyone is made whole.

Hope this clarifies.

Thanks again for all the responses

cash purchase in LLC, then seek financing?

Most Popular Reply