What’s the Secret sauce?

Question

I’d like to begin looking for my second financed property, but would like to place this one in my LLC. My lender wouldn’t allow me to do so the first time around. After speaking with other lenders recently, I’m still running into this issue. However, investors keep telling me to either place in LLC initially, or transfer it after. Either way, this doesn’t seem to be working out for me. What am I doing incorrectly?

Brandi Jenine · Answer

Thanks, Alex!  Yes, this does help a great deal!  Yes, that is what I was concerned about of course...having my lender call my loan if it gets transferred to my LLC and require me to pay the loan in full.  My lender mad it extremely clear that I couldn't transfer, but I am looking to refi soon so this will be something I will explore with my next lender.

Again, thank you for taking the time to explain this to me! I appreciate it!

Alex Breshears · Answer

HI Brandi!

I think what you may be running into is just a bit of confusion about the lending side of the house. Easy fix. First, your primary home was probably what is termed a conforming loan. So there are parameters that must be met such as credit, income evaluations, asset verification etc.  They must do this because the loan will most likely be sold as soon as the loan is closed and you have made the first mortgage payment. This process allows for the capital to then become securitized and basically recycled to be used in future loans.  This is conventional loans, usually owner occupied loans but there are investment property conforming loans.

You can transfer a property to your LLC with conventional financing, as long as you qualify for one of the exemptions.  The one that sounds like it will most likely fit in your scenario is that you are a majority owner of that LLC.  The borrower on the conforming debt must be a majority owner of that LLC, and in theory this will not trigger the due on sale clause.

https://servicing-guide.fannie...

Here is a link for Fannie Mae guidelines. Freddie Mac might be a bit different, so it is worth asking your lender about this if you are wanting to go down the conforming loan route (where you are being underwritten as the borrower for income, assets, etc).

Now there is another "class" of loans termed non-QM or nonconforming. That's a big wide field of options, but generally they do not check all the boxes for conventional underwriting on some level. Maybe they don't check credit scores, or they lend to businesses (LLC). Whatever it is, this non-QM stuff won't end up down the conforming pipeline.  There are aggregators of loans that are non-conforming, with some stipulations of course for some level of conformity of the loans parameters. If you want to have an LLC be the borrower and you as a person are not getting the full conventional underwriting treatment, this is the space you are going to be operating in.  A few options you might be familiar with are hard money loans (where they look at the asset more than the borrower), or a portfolio loan from a small regional bank in your chosen market that plans to keep that loan on their books and earn the interest from it.  Obviously having an established banking relationship with them helps, so opening a bank account for your LLC with that bank you hope to work with in the future might be a good first step. As a beginner, many lenders are likely going to require a personal guarantee (often referred to as a PG).  That means should the asset for whatever reason not fulfill the debt obligations if the loan goes into default, you are personally responsible for the shortfall in the difference. While these loans won't show up on your credit report, future lenders may ask about debt that doesn't appear on your credit report, and they will want to know what's outstanding that you are personally liable for, just for their own risk assessment.

I hope that helps clear up some things for you!

Olivia De Oliveira · Answer

Many investors take advantage of the financing available for properties they purchase in their own name. Then, after the fact, they quit claim deed the property to their LLC. I previously purchased a property in the name of my LLC and obtained a commercial loan. The interest rate will typically be higher with those though - which is why many investors go the first route I described.

Brandi Jenine · Answer

Thanks, Mike! Lots to learn!

Brandi Jenine · Answer

Hi Matthew!  Well, I was advised to do this from day one by SEVERAL people.  Mainly for the allowance of the split of my personal assets vs. the investment assets.  I was actually advised to have each property in its own different LLC.

Since I was unable to do so, I do have umbrella insurance.  However, the next one I will want to go the LLC route.

Brandi Jenine · Answer

Thanks, Megan.  I am learning a lot with this side of the house.  I'm doing some research now, but will for sure circle back if needed.  Thanks!

Megan Templeton · Answer

Hi there! @Brandi Jenine

The type of property and type of loan you are trying to get can impact this. Feel free to reach out with more details and Ill help as much as I can!

Thanks,

-Megan

Matthew Irish-Jones · Answer

@Brandi Jenine you can use a commercial loan if you would like to buy through an LLC.

Why do you want to purchase through an LLC?

Malcomb Stapel · Answer

The process is pretty simple

1. Secure financing under your personal name and take possession of the property.

2. File your (quit claim deed) this can be done through an attorney, or some lenders offer it in house for cheap. I have one lender that charges $28 per.

3. Continue making your payments to the lender.

The concern some people have is the due on sale clause that is more than likely in the contract when you apply for the financing. Essentially, they could find out that you deeded it to your LLC and decide they want to ask that all of the money you borrowed be paid back immediately.

Mike Davis · Answer

@Brandi Jenine hard money lenders (HMLs) will prefer to do these in the LLC. You may have to sign a personal guarantee when placing in the LLC, as long as payments are made, it will not report on your personal credit file. If you transfer a property from your personal name into the LLC, make sure there are no issues with the title insurance in doing so.

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