Financing First Rental Through an LLC

[Michael Neiman]

So here is basically the gist of the situation:  

A few friends and myself have been building capital to purchase rental properties. The five of us are all 25 and are doing this together to scale as quickly as possible. Amongst the team we have a two accounting backgrounds and a freshly barred attorney specializing in real estate and we have about $50,000 in capital saved up in a bank account in the name of our LLC.

We've seen a ton of negative information about financing through an LLC and are now hesitant if that would be the best option. Should we just begin going to banks (local or national) or credit unions to see who will offer us a conventional loan? We're ready to dive in and have located a number of properties so this is the last thing holding us back.

Any advice is appreciated!

[Rob Beeman]

@Michael Neiman If your plan is to purchase turnkey rentals with your LLC, local banks and credit unions are certainly a good option. However make sure that you are communicating with the commercial finance division (even if the property is a single family residential property) NOT the residential finance division. If the loan officer uses terms like DTI (debt to income) then they are a residential loan officer (commercial loan officers would use the term DSCR in place of DTI).

The reason for working with the commercial lending division is that you want to keep the property deeded in the LLC and have the loan issued to the LLC (with the members of the LLC being the guarantors). Normally this will mean that the loan should not appear on credit reports (as long as it doesn't go into default). The rate will be slightly higher as a commercial loan, but still livable. The down side to buying a turnkey property is that the typically any equity in the property is what has been created by the down payment that you made.

If your plan is to purchase a property that needs some improvements/updates, have the improvements completed, then gain a tenant - then you might want to consider a rehab lender that would extend financing for a portion of the purchase & improvements. The rehab lender would extend a short-term loan at a higher rate and fees, however you would be gaining equity in the property when you conduct the improvements, perhaps increasing the market rent - thus increasing the value. 

After improvements are completed and the tenant lease is in place you would refinance with the local bank or credit union for a long-term loan at a lower rate and perhaps be able to recapture some of (or all) your funds invested to date in the property during the refinance. This is called the BRRRR method (Buy, Renovate, Rent, Refinance, Repeat).

You guys have much to research and discuss prior to investing, and please remember that whichever option you feel is best for your personalities and risk levels, always buy in markets (geographical areas) that you are comfortable with and are OK visiting any time of the day or night. Good luck.