How to Buy Houses as a Corp or LLC?

Question

Hello everyone,

I'm looking to buy two townhouses and rent them out. I was told I could only get a personal loan. How do I buy these properties as a corporation? Can I buy them on a personal loan and eventually sell them to my corporation or LLC? Or do I have to form an LLC first and then buy the properties? If it's the latter, how do I get a loan, especially since the LLC would only be in business a few days?

Thank you,

Jason

David M. · Answer

@Alex Smith

So, basically you are looking to make a Management LLC.  You would need to make an agreement between yourself and this Mgt LLC to lease out what is your personal property.  Depending on your setup, some of the expenses could/would be paid by you personally, e.g. property taxes, while the mgt LLC might pay for others, e.g. repairs.  You get limited amount of limited liability protection.

Remember, you don't need the LLC to take the deductions.  Unless you are investing with a non-spousal partner, the LLC or any legal entity provides no real tax benefits.

Good luck.

Alex Smith · Answer

Thanks @Nate Reed. Your post made me think to buy with a personal loan, start an LLC on the side, and then record the cashflow on the books of the LLC while the rest of the rent pays down the personal loan. Think I'll explore this and see where I wind up in a year or so.

Nate R. · Answer

This is an easy question to answer: You simply need to find a commercial lender who will underwrite your loan on the rental income that the property generates. The terms will be worse than a conventional loan: higher interest rate, higher fees, prepayment penalties, escrow requirements for 2-3 months rent if vacant, etc. I was recently quoted 5.75% 30 yr fixed, 3% origination fee, 5 year prepay penalty. Amazingly, the deal sort of worked, but the cash flow was pretty thin.

As you will be personally guaranteeing the loan, it doesn't matter whether you form the LLC first or put it in later. Of course, it avoids the need to transfer title if you just go ahead and form the LLC first and get the loan in the entity's name.

Alex Smith · Answer

Thank you @David M.! You're the man.

You too, Steve, thanks for the feedback.

Steve Morris · Answer

Well in any case you're going to need to personally qualify for a loan.

An LLC is just a way to hold title, but (if you're in those states), you're going to have a trust deed recorded regardless of what has the title.

David M. · Answer

@Alex Smith

Here is a whole smattering...

https://www.biggerpockets.com/...

Alex Smith · Answer

Thanks, @David M. for your detailed response. If you find time to send those links that'd be much appreciated. I'll try to find the topic on other chats on this site in the mean time.

David M. · Answer

@Alex Smith

Oh and it you want to purchase direct with a LLC, just write the buyer as “Alex Smith or an entity to be formed.”  Once you go under contract, form the LLC.  One technique is name the LLC the street address of the property (if you are going to go this route of one to one)....

David M. · Answer

@Alex Smith

Well, it’s not advisable to hold property in a C Corp...

Legal entities such as LLC are not eligible for conforming residential loans.. that’s why most lenders, who are residential lenders, will want you to have title in your personal name then quit claim deed it to your LLC.

I’m on my smartphone right now, otherwise I’d give you some links to prior threads.  This is discussed all the time.  The short of it besides the Due on Sale Clause, you need to protect/maintain your corporate veil of your LLC.  One sure fire way to pierce your corporate veil is co-mingling funds.  So, with the mortgage in your name but Title in the LLC, whose bank account makes the mortgage payment, for example.??

Another is using the LLC as an alter ego.  It’s a separate entity.  So transferring title to the LLC while expecting to receive all the rent payments it’s collects is very fishy to this layman.  Nobody in bp has yet to provide an alternative answe.

My understanding for real estate, you would personally guarantee the loan for your LLC to get a mortgage, albeit a commercial loan.  So, it’s similar to a co-signer.  That’s how the LLC gets a loan without having a credit history or true income stream yet.

That’s the short of it.  When I’m at a pc I’ll try to remember to send you some

Prior threads to read. Remember, the LLC is really on there to provide asset protection / limited liability, not any accounting or tax benefits (unless you are investing with a no spousal partner).