How does a Lender/Broker view transactions for an LLC?

Question

Hello BP Community!

I'm new to the game of real estate investing and I'm doing my best to dig deep into the resources available here to make sure I start off on the right foot! The BRRRR strategy appeals to me in the pursuit of long-term Buy-and-Hold properties (SFH, DPX, or TPX). As I research the Pros/Cons of getting an LLC, I have also arranged meetings with both a Real Estate Attorney and a CPA. Note that my long-term goal is to set up systems for my investing business to facilitate long-term use.

From my understanding so far, an LLC is helpful in that it offers tax advantages and asset protection (if handled properly). However, since it is a business entity, the LLC may also create additional challenges when trying to arrange financing. It seems the LLC will be necessary for my long-term strategy, but is it actually a hindrance when starting out?

The Question:
How would these 3 different parties (hard money lender, local credit union, loan broker) each be willing to engage with an LLC at the start and end points of the BRRRR process?
1) Up-front capital (or loan) to purchase a property
2) Post-rehab refinance to pull cash out of the property

David M. · Answer

@Corey Farnsworth

Maybe start here:  https://www.biggerpockets.com/...

First, unless you are investing with non-spousal partners, the LLC provides no tax advantages.

Legal entities such as LLC's are not eligible for conforming residential loans.  You'll have to pursue commercial financing, aka non-residential lenders, to do it right.  "Frankensteining" your transaction by buying personally and flipping it into the LLC is poor strategy, albeit done often.

Hard money lenders generally prefer, if not always, want a LLC because it also protects them.  Otherwise, I think the general answer to your question is you need to find a "good" commercial lender.  That's it.

I'm not really a fan of LLC's for residential properties.  The entity effectively incurs much additional costs (mainly the financing) with additional administrative burdens to maintain the corporate veil.  Meanwhile, your risk can be personally managed with a homeowners/landlord insurance policy, umbrella insurance policy, and keeping the property in good upkeep.

Hope this helps.  I'd be happy to chat if you like.  Good luck.

Account Closed · Answer

LLC's do not provide protections against lawsuits. Do a lot more research. If you want protections then increase your insurance policies and get a blanket policy.

Ken Naim · Answer

@Corey Farnsworth LLCs protect your personal assets from lawsuits related to the property owned by the LLC as well as protect the LLC assets from lawsuits brought against you personally, say a car accident resulting in  a multi million dollar lawsuit.

Insurance is a neccessity as well but it is a first line of defense, so is a large mortgage, the LLC is another line. More lines between your assets and lawsuits the better.

When your first starting out skip the LLC as you don't have much assets to protect, and your very unlikely to be a target beyond your insurance.

Once you have a $$50-100k in a property then consider an LLC. For residential bank loans buy in your name then move to an LLC. Hard money lenders usually don't care and you will likely need to sign a personal guarantee if you're taking a high LTV.

It makes no difference to a realtor.

Nick Velez · Answer

@Corey FarnsworthHey Corey, in terms of how a brokerage will interact with an LLC, it comes down to which loan product you go with. As mentioned above, closing in a LLC with a conforming loan usually does not happen. There are non qm loan products however, that will allow you to close in a LLC. I am in the process of doing a DSCR loan for a short term rental here in Florida, and I will be closing in a LLC.  Someone mentioned that you could close on a loan in your personal name and then transfer title into your LLC, but not all lenders will allow that and it could put you at risk for the due on sale clause. I work with an investor who is in asset protection mode, and he was able to transfer title into LLC's for some of his properties with no issues, and on the other end, some of the lenders for his other properties told him no. Feel free to message me if you would like some more info on the Non Qm options that are available to you, or if you want to connect. I am about an hour and a half from you in Gainesville Fl.

Dave Spector · Answer

@Corey Farnsworth: from a hard money lender's perspective, purchasing your investment property in an LLC (or other business entity) is strongly preferred/mandatory for a number of reasons. Also, IMHO: if you have other assets, an LLC would also seem to provide an additional layer of protection (from your contractors and BRRR tenants).

Basit Siddiqi · Answer

@Corey FarnsworthIf the LLC is a single member LLC, it will be reported directly on your individual tax return.They would look at your individual tax return.If the LLC is a multi-member LLC, the income gets reported on schedule E. They will look at the K-1 and potentially ask to see the partnership return depending on your ownership % in the LLC.There are certain things lenders/brokers add back such as depreciation and one-time write-offs(roofs, HVAC, etc).Best of luck.

Corey Farnsworth · Answer

@Danon Albert

I had an introductory consult with my attorney and confirmed he can help me set everything up as needed (LLC, lease agreements, etc), but he advised I meet with a CPA soon as well, then bring them both together for a joint meeting to confirm our strategy before setting anything up. I’ll be meeting with the CPA in a few weeks.

Corey Farnsworth · Answer

Thanks everyone for the feedback! @David M., that link to the other forum thread was very helpful as well. So it seems that some kind of umbrella insurance is a must, and the LLC would add additional layers of protection once you've reached a point in asset-building that is actually worth protecting. That's good to know that the tax advantages are generally the same whether you're operating by yourself or inside an LLC. I guess the real "limiting" conversations would come from talking to a specific hard-money lender about who/what they're willing to give funds to. And I could talk to a broker ahead of time as well to make sure they're willing to refinance the loan at the end, or what would prevent them from considering it (to an LLC, or personally).

I'm still a bit lost on the concept of using 1 LLC to "manage" several other LLC's that actually "own" the properties. I've heard of people using this strategy to help separate their name from being tied to all the units, but I've also heard that it looks fishy under a microscope.

I have a meeting with an attorney this week to discuss some of my options and hope to get some feedback on what strategies would work well here. Perhaps using a Trust would be a good way to go too.

Account Closed · Answer

LLC's don't protect you against lawsuits since if you are the owner of the LLC then a person suing you goes after your personal interest in the LLC just like when you have an interest in the stock market, or cash in the bank. When 'Push Comes To Shove' you will find that your lawyers, accountants and advisors all have their personal agendas and the more mistakes you make the more money they make correcting your mistakes.

"The More You Own The More You Have To Maintain"!!! It is a shame to pay the costs every year for useless LLC's when that money adds up over a 5, 10, 20 and 30-year period and can be uses for wiser and more-profitable investments.

Life is strange. I always say, "people who have the lower annual incomes often make the wisest decisions and make the most profit from investing their money". This is because people who don't make a lot of money are more cautious before spending their money. I have an employee who has been with my company for more than 25 years. He earns $3,000 to $5,000 every week, purchased a house in a rougher neighborhood about 10 or 12 years ago for $305,000 and he is broke every week. I have a semi-illegal employee who has been working on getting his permanent residency. He earns $80,000 to $100,000 annually and just a month ago he purchased his 3rd rental property and put $50k down on it.

I would not waste one penny on an LLC unless it was 100% mandatory and that won't ever happen!

David M. · Answer

@Corey Farnsworth

You might save yourself some money..  Does FL have standardized Realtor forms?  In NJ we do..  Get yourself a copy of the lease agreements and work from there instead of paying the attorney to prepare "from scratch" or for what they have.  If you have standardized forms, he shouldn't even charge you for reviewing them...

How does a Lender/Broker view transactions for an LLC?

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