Lending to the Individual vs the LLC/Inc.

[JJ Mayer]

Question - would love to get a lender's perspective on this...

We have 3 partners that each own a 1/3 interest in our "rental business", but we do not have a formal partnership agreement or an LLC or a Corp set up. So, in effect, we treat it as 3 cooperating sole proprietors.

Now we are looking to take on more debt to expand and buy a bigger, out-of-state multi-unit property.  We've had all of our existing properties cash flowing for more than 1 year, so we can show ongoing "business" profits, but how will lenders look at this?

Without a LLC or Corp, will the lenders evaluate the loan request based our individual credit? or will they take into account our good track record?

Thanks!

[Stephanie P.]

@JJ Mayer

disclosure: I am not a CPA or a tax attorney.  Seek professional advice before making these kinds of decisions.

Having said that, we only lend to entities and I think, before you go too much further with the partnership, look into an LLC to limit the liabilities of each member rather than open up your personal assets to potential (frivolous or not) down the road. With an LLC, your exposure is only the personal assets you've put into the entity rather than all of your personal assets. There is virtually no tax incentive because it's treated as a pass through entity, but if you do it right and separate personal from business, there is at least that level of insulation.

In addition to the credit of the individual members of the LLC or partnership, many lenders look for a track record (that really only means that you've been doing it for a while). On the other hand, lots of lenders don't look at income (which means the track record really doesn't mean much to them) and only the credit and the value of the property. It just depends on the lender. For some, you'll get an LTV hit for first time investor, for others you'll be okay because you can trace the LLC back to other properties with the HUD's.

The level of scrutiny (underwriting income etc...) dictates the rate so a no income product will be less expensive than a full doc loan, but a recent LLC may trigger a denial because it's less than 2 years old. Hard to tell.

Hope that helps.

Stephanie