How to protect assets if banks don't lend to LLCs

Question

I've always been curious about this. It's recommended to start an LLC to protect your assets in case of a lawsuit. But I've also read that banks don't lend to LLCs.

So how does that work? How do you get a loan and put your investment properties in an LLC to protect them?

Thanks in advance.

Chris Mason · Answer

Lawyers get paid to consult & set up LLCs for 'asset protection,' and then other lawyers get paid to 'pierce the corporate veil' or whatever. But then you pay your lawyer extra to teach you how to make it hard to 'pierce the corporate veil,' so you're good now, right?! Well, no, because then the other side (possibly being a pro bono tenant's rights nonprofit...) hires a specialist lawyer that's an expert on trumping whatever you just did, and so on. It's a wash, with the only thing certain being greater and greater legal fees (but there are no "landlord's rights" pro bono legal assistance firms, at least not in my area).

Kind of like how a real estate agent chasing a listing is always going to say it's a good time to sell, or kind of like how one of me always finds a solution to the real estate problem at hand that involves originating a mortgage, etc etc. You've got to consider the source & training of whoever your talking to: agents are trained to seek listings, lawyers are trained to seek legal fees by providing legal services, loan originators are trained to originate loans. If everyone is being 100% ethical then none of these things get done unless they really should get done (& I pride myself on my refinance inquiry decline rate), but by the time the consumer is done 'shopping' 5 different professionals, they are really just finding the best salesperson who can/will convince of the merits of doing the thing in question (hence the LLC mania).

If anonymity is a concern, a revocable living trust can get a Fannie loan (do you see how I defaulted to originating a mortgage loan? See above :P ), and Mr. Smith can call his trust the "Batman Family Trust" or the "Screw You My Name Is A Secret Family Trust." Pair that with a solid umbrella insurance policy. And of course I'm not a lawyer, so you definitely should go talk to your lawyer so they can sell you an LLC give you qualified legal advice.

Jay Hinrichs · Answer

If your worried about protecting your assets from the bank the only way they are coming after you is if your going to default and you have personal guarantee which 99% of the time if your buying in your LLC the bank will require.. now when you move to much larger loans.. PG's are not required and there is no personally liability you simply hand in the keys.

If your worried about 3rd parties sueing you.. IE tenants or the general public that gets hurt on your property or an employee or worker gets hurt on your property.. asset protection is not what you want you want GREAT insurance.. that's what protects you.. your mean insurance lawyer wears down the other side and or settles..

this thought process that an LLC is going to save the day is well just a though process @Chris Mason  as Chris mentioned Lawyers pierce those all the time.. there are 90 ways to pierce them. and I can 1000% tell you even if you have the property in a trust an LLC or any other vehicle.. the other party will name you personally and you will spend multi thousands with motions in Limini trying to get your personal name out of the suit and most of the time you will lose that argument.. as these vehicles are simply a ruse to protect you and the judge see's right through it.. and will simply rule against you.

YOU NEED and WANT great insurance.. And if you default to your bank well your going to have an issue plain and simple unless its very clear cut in the loan docs that these are NON RECOURSE Loans.. which those are available but you usually have to be pretty financially strong to get them and or the loans VERY large multi millions.

where LLC is good  is simply an easy form of ownership tax wise.. Uneven profit distributions... some amount of anonymity and a nice document for spelling out the business arrangement in the operating agreement between parties. You also don' have all the intense house keeping of a corp etc. that's the benefit of them.

Andres M. · Answer

Thank you @Jay Hinrichs

David S. · Answer

@Chris Mason touched up on insurance.  You should definitely have a large 7 figure umbrella policy to protect you from lawsuits. This is regardless of whatever entity you decide on i.e. LLC, Trusts, personal name etc.

Check with a professional on this, but I believe an LLC can have a loan with 2 years of income history.  There is always the non-Fannie Mae route such as commercial or portfolio lenders. Many of these loans come from small, local banks. Typically, these loans will be a higher rate and may even be a balloon type note due in 5 or 7 years, or a 5 to 7 year ARM, but with a longer 
amortization period, like 20 or 25 years.

Andres M. · Answer

Thank you for the great info guys.

@Chela O'Connor, is the interest rate on an "LLC" a lot higher than a conventional loan (what's the rate)? What about the term, shorter number of years?

I'm not anywhere near at the point where I need to do something like this. I just want to educate myself for when the time comes.

Thanks again.

Chela O'Connor · Answer

Banks do lend to LLCs.  My business is an LLC and we have several loans with our local bank.  We do work with the Commercial side of the bank, but that was not your question.  If you want the benefits of buying as an individual you have to take those risks (personal liability).  If you want the benefits of buying as a business you have to take those risks (shorter amortization, variable rates, etc.).

No one "sold" me an LLC.  It took me less than 30 minutes to do it myself and it cost me $130.00.

Ask questions about the process in your area on the Legal forum.  Maybe connect with an investor from your area that knows good lenders and the LLC process.  BP always comes through with information.

Good luck.

How to protect assets if banks don't lend to LLCs

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