Cosign or Form an LLC?

[Kevin Brenner]

BP Fam,

I have a 4 unit under contract and I'm looking for a bit of advice on the best way to purchase this property. The property is under contract for $318 and needs $55k in rehab. The ARV is $485k. I will be BRRRRing this deal and am looking for a bridge loan with a maximum term of 36 months.

I have a Private Money Lender ready and willing to front the 25% DP ($80k). We have agreed to terms on a private loan structure and will sign a promissory note and personal guarantee. After all debt service (mortgage and personal loan) on a 75/25 LTV refi I will be left with approx $20k.

The plan was to use traditional bank leverage to finance the rest of the property. Because I own other properties, my DTI is not favorable to qualify for the mortgage on my own. So we have a few options on the table to consider:

1). Cosign with my PML on a Freddie/Fannie Investment Loan Product (Fixed rate, 30 yr Am, Lower Rate, etc.). While this offers the most favorable terms, my PML is in LA, I live in DC, and our property is in GA - so we'd have to do a double remote close which definitely will add to closing costs.  Also, my PML will be on the loan/title with me until we refi and quit claim. 

2). Form an LLC and purchase the property using the entity to purchase the property with a commercial loan (5-7 yr ARM, 20 yr Am, Higher Rate, etc.). While more expensive, this would allow us to protect ourselves. Is home insurance on a residential loan more or less expensive than business insurance on an LLC? Regardless, this option seems more expensive than the residential loan, but would save us the hassel (and costs) of the double remote close. At the refi, my PML can simply quit claim the property to me and I will be the sole owner of the LLC.

3). Pursue non-institutional lending to provide a bridge loan that covers the building and the estimated rehab costs.  I'm working with a broker now who has a 1% origination fee (which could be approx $3.5k).  Not sure what the other lenders will charge...I'm sure they have fees though.  So higher closing costs for sure, but having the 55k rehab costs wrapped into the loan allows me to begin work almost immediately, which means I can stabilize the building faster and refi out faster.  Still waiting on the terms of this product, but it does sound appealling.

I'm supposed to close on 17 May - although I may be able to work with the seller to push a week or so if need be. 

Appreciate any feedback I can get!  Thanks.   

[Caleb Jordan]

Originally posted by @Kevin Brenner:

BP Fam,

I have a 4 unit under contract and I'm looking for a bit of advice on the best way to purchase this property. The property is under contract for $318 and needs $55k in rehab. The ARV is $485k. I will be BRRRRing this deal and am looking for a bridge loan with a maximum term of 36 months.

I have a Private Money Lender ready and willing to front the 25% DP ($80k). We have agreed to terms on a private loan structure and will sign a promissory note and personal guarantee. After all debt service (mortgage and personal loan) on a 75/25 LTV refi I will be left with approx $20k.

The plan was to use traditional bank leverage to finance the rest of the property. Because I own other properties, my DTI is not favorable to qualify for the mortgage on my own. So we have a few options on the table to consider:

1). Cosign with my PML on a Freddie/Fannie Investment Loan Product (Fixed rate, 30 yr Am, Lower Rate, etc.). While this offers the most favorable terms, my PML is in LA, I live in DC, and our property is in GA - so we'd have to do a double remote close which definitely will add to closing costs.  Also, my PML will be on the loan/title with me until we refi and quit claim. 

2). Form an LLC and purchase the property using the entity to purchase the property with a commercial loan (5-7 yr ARM, 20 yr Am, Higher Rate, etc.). While more expensive, this would allow us to protect ourselves. Is home insurance on a residential loan more or less expensive than business insurance on an LLC? Regardless, this option seems more expensive than the residential loan, but would save us the hassel (and costs) of the double remote close. At the refi, my PML can simply quit claim the property to me and I will be the sole owner of the LLC.

3). Pursue non-institutional lending to provide a bridge loan that covers the building and the estimated rehab costs.  I'm working with a broker now who has a 1% origination fee (which could be approx $3.5k).  Not sure what the other lenders will charge...I'm sure they have fees though.  So higher closing costs for sure, but having the 55k rehab costs wrapped into the loan allows me to begin work almost immediately, which means I can stabilize the building faster and refi out faster.  Still waiting on the terms of this product, but it does sound appealling.

I'm supposed to close on 17 May - although I may be able to work with the seller to push a week or so if need be. 

Appreciate any feedback I can get!  Thanks.   

I think all options have pros and cons. Would you borrow rehab funds with conventional?  If you don't property may not qualify because if its condition is really bad. If you do borrow rehab funds with conventional you may not be able to close fast enough, that is a whole new layer of underwriter and paperwork.

But I don't think remote closing will substantially add to your cost. I've closed out remotely and just had to pay for notary.  Will your private lender have lien on property. Options 2 and 3 may not fund on a property if there is another lien, that is something to think about. But those options will generally be able to close much faster.