Refi and LLC for BRRRR?

Question

When using BRRRR, if I acquire the property using LLC, I’d have trouble refinancing...  I’d imagine that we’d have to get the property under personal name and then refinance.  From acquiring the property to rehabbing and renting and selling, this process might take up to a year or more?  Doesn’t this leave the investor vulnerable to having the property under personal name Rather than in a protected entity like LLC?  What are your thoughts?  How do you guys do it?

Ki Lee · Answer

@Nicholas Settoon

When you get a personal mortgage using your name, there is a “due on sale” clause that allows the banks to demand the full payment of the loan  when you sell the property. When you transfer the title from you to LLC, it is considered a “sale” and the bank can call your note due.  In reality this doesn’t happen often because banks aren’t necessarily tracking everyone closely.  This typically happens when the bank sells your mortgage to another bank(which happens somewhat regularly). To avoid this you can transfer the interest of the property to land trust.  And when you structure it properly and designate the beneficiary as your LLC, the bank won’t know that your House is under LLC. Land trust beneficiary is confidential and not public info.  Furthermore, designating the interest of the property to a land trust is fairly common and is not considered a “sale.” So this ensures privacy as well as avoiding the “due on sales” clause.  Let me see if I can find a video on this and I’ll send it to you via PM.

Nicholas Lohr · Answer

Having good insurance is fine.   I used to think the LLC was absolutely needed too, it isn't.

Jason D. · Answer

@Ki Lee I've done it all within an LLC. No problems buying, rehabbing, or refinancing.

Kenneth Garrett · Answer

@Ki Lee

If the property is owned under a LLC you will need commercial financing.  The advantage is there is no seasoning requirement, a lot less red tape, easier process.  Provide Articles of LLC, Operating Agreement, EIN number.  No bank statements,  no explaining why Aunt Sally gave you $10 at Christmas and you deposited it in the bank.  It’s all based on the cash flow of the property (DSCR - Debt Service Coverage Ratio).   No limit on number of loans. Disadvantage is the rate is higher and a shorter time frame.  6% amortized over 20 or 25 years 5-7 year balloon.   I use LLC’s all the time.  It’s just a preference.  There is no right or wrong.

Nicholas Settoon · Answer

@Ki Lee can you explain this in more detail bc I’m in this exact position and don’t know anything about a land trust? My mortgage broker told me I could purchase a property in my name to get conventional financing then turn around and transfer the property into an LLC after.

Jason D. · Answer

@Nicholas Lohr I use commercial financing for single family houses, because I own them in my LLC. I dont want my personal name on anything associated with my rental business. So the LLC owns the properties and is the borrower of the loans.

Kenneth Garrett · Answer

@Ki Lee @Nicholas Lohr @Jason D.

You can use commercial financing for SFH, two, three and four units.  I use small local banks.  The purpose of the LLC is asset protection.  If you own everything in your personal name and there is a law suit against you personally then those properties would be exposed and vulnerable to the suit.  I understand umbrella insurance is very popular on this site, but for me if there is a catastrophic incident on your property you can never have enough insurance and the next level would be your assets which includes things in your personal name.  Check out You tube videos with Mark Kohler on this topic.  He is a CPA and Attorney who explains it in very simple terms.

Ki Lee · Answer

@Nicholas Lohr Yes, It is for a 3-unit.  @Jason D. and @Kenneth Garrett can you verify that this is a viable strategy for 3-unit house?

It's my personal opinion, but I'm not sure if adequate insurance is enough.  Insurance will cover instances where a tenant has an injury on the particular subject property(internal threat), but if the owner gets sued from other properties(external threat) or from something unrelated to Real Estate(personal litigation/business lawsuit), the rental properties under his/her name can all be foreclosed to pay for damages.

Nicholas Lohr · Answer

@Ki Lee I got the sense you were talking about a single family house, duplex, tri-plex or 4-plex correct?

If so I would be very surprised if the others on this thread thought it a good idea (or even possible) to use commercial financing for that.  Honestly I've never heard of anyone using or a bank even offering commercial financing for a property under 5 units but I've only been at this for 3 years so I could be wrong... but it would be news to me.

Jason D. · Answer

@Ki Lee Yes. LLCs can, generally, only qualify for commercial financing. You'll guarantee the loan so they still use your credit history, but they look for the property to support itself. Much easier approval process, but it's a little more expensive.

Refi and LLC for BRRRR?

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