How Do You Finance Within an LLC?

Question

I’ve talked with several lenders and have found a few that do have programs to loan within an LLC. The problem is the rates are so high (6.5% -8.5%) for a 30 year fixed that it would require me to get a really super phenomenal deal on a property to meet my target cash-on-cash return of at least 9% and monthly free cash flow of at least $200.I know many people on here use cheaper rate conventional loans such as FHA and VA and don’t have an LLC. I also realize some people use these conforming loans and then move the title to their LLC and roll the dice on the loan being called for violating the typical due on sale clause. I do not want to take this route. I want to finance within my LLC and am determined to find a loan program that works. I’m ok with buying a house for cash upfront and then re-financing within LLC as well. Does anyone have advice on how to get a reasonable loan within an LLC? I’m looking for a 30 year fixed and I have great credit and capital to invest.Thanks

Scott Smith · Answer

I did just post this in another thread you had started, but this is a strategy that can be implemented to access favorable financing options while still getting the benefit of the asset protection from an LLC. Check out this article. You can still buy the property in your own name, but at that point you will transfer it into a Land Trust rather than directly into the LLC. After it is in the Land Trust you can create the LLC as the beneficiary and yourself as the trustee (the manager.) When established in the correct order the Land Trust doesn't trigger the same red flags with the Due on Sale as the direct transfer of a deed into an LLC, and the Land Trust can be created in such a way that your name does not have to appear on public record for the property - you can have your attorney sign for it as a "nominee trustee" until it is formed and then have it pass down to you after the signing is complete.This is a much more flexible system that works at large, but if you can find a bank that works direct and favorably with an LLC that is generally a bit easier (though your name will still appear on public record for that property.)This isn't legal advice, just my opinion as an investor.

AJ Leman · Answer

Hi Britt,We finance all our properties through our LLC. We use a local bank that we have a good relationship with. There is less regulation when you go the commercial lending route. However, our bank will not do a 30 year fixed commercial note. Instead, all of ours are 5/25s, so fixed rate for 5 years, then resets to the current market rate. This is a little riskier, but it has worked out well. Our current rates were in the 4.5% range last year and this year are in the 5.5% range. I think if you want a reasonable 30 year fixed note, it probably will not be through your LLC. This is just my experience and different lenders could be different.Best of Luck!AJ

Jay Hinrichs · Answer

what your seeking does not really exist in the market place.. and your on the right track to limit your loans on rentals that have 5 year calls.. those types of loans sunk a lot of investors last GFC when their loans were called and credit was frozen.. lots of perfectly performing properties were lost.

Jared McCullough · Answer

Currently working with a lender that is similar to Aj. It is 5.4% with a 5 year reset. I think they offer out to 30 but I am only going with a 10 year so didn't investigate it that much. The loan will be for the LLC with which will allow us to deed the to the LLC. I personally was really hoping to do a HELOC but at the moment the COFR through this bank was the only one I could find willing to loan to an LLC with our current experience (i.e. basically 0 operating history).

Britt Clark · Answer

@AJ Leman - Thanks for the information. I've also talked to a few of the smaller local banks in my area. The deal they give is a 5 year fixed with a balloon at end of the term. The payments are based on a 20 year amortization schedule. The rates are currently around 5.5%. The thing I don't like about these is you have to re-fi at the end of term and it restarts amortization and you incur more closing costs.

Jay Hinrichs · Answer

you need to read your note.. on commercial loans they are usually call notes with a roll over at a new interest rate.. they are not owner occ adjustable rate mortgages that adjust to a certain % over libor or prime. READ YOUR NOTE and if you don't understand it have an Attorney read it.. along with your mortgage those are usually 10 pages or so long.. And of course you will have your personal gurantee doc those are the three you need to read and fully understand.Just like people think they can get a heloc like its a 30 mortgage when in fact they can BE called or frozen at ANYTIME at the sole discretion of the lender.. these are just things to be aware of .. and fully informed

Jay Hinrichs · Answer

keep in mind we are at a stage in the market were we have two things pulling against us. One all these wholesalers jacking up purchase prices to feather their nests.. rates rising rehab cost have risen. but RENT has pretty much stayed consistent in most markets were folks look for 6 to 12% cash on cash returns with 20 to 30% down.. so the purchase price of the asset needs to go down to keep returns in play.. or investors have to settle with the new norm. of 3 to 6% return

Britt Clark · Answer

Jay - Yes, I'm figuring that out as far as the lack of loan options for RE investors in LLCs. I worked in corporate finance for 23 years and it's certainly a different animal than dealing with real estate finance in certain respects. To your point on leverage: I am 100% with you on not over-leveraging. I cringe when I see cheerful posts about getting 75 different loans doing 15% down with balloon payments due in 5 years. Yikes.I have some capital to deploy and am trying to do it smartly and mitigate risk as I build an RE strategy. I'm not old, but I'm not young either. I can't afford to cripple my modest net worth with a dumb move now. Thanks for the input and insight.

Matt Brooks · Answer

@Britt Clark My wife and I ran into this same scenario starting out. We also wanted to finance thru the LLC. I would suggest talking to local, independent banks and building a relationship. We also found that if you have solid credit and cash they are willing to be somewhat flexible on what they offer. Tell them what you are looking for, if it’s within reason they may work with you. Through our LLC on rental property we are currently closing on a triplex with the following loan criteria: 15% Down Payment 10 year fixed/30 year amortization 6% No PMI Good Luck!!!

Henry Kaldenbaugh · Answer

Here's a different perspective. If you have a 401K or 403B account you can have it hold the mortgage (trustee) and your LLC will be the Trustor. This way the interest stays in your basket of assets.