LLC for 9 plex, will it affect DTI

[Hannah Forman]

Hello, I am a real estate rookie. I am hoping to seller finance a 9-plex from a family member, but I am trying to figure out the logistics. I want to keep it very professional, and set myself up for success as a business. I understand as soon as you get greater than 4 doors its considered commercial, but not sure how seller financing comes into play with this. 

My question is, if my husband and I create an LLC, and do the seller financing through the LLC and a business bank account, will this affect our personal DTI? We are also hoping to buy a personal SFH through a conventional loan, but not sure how our DTI will be affected by the 9-plex.

Any help is much appreciated! This is all new, and I've been reading the RE Rookie book suggested on here as well as listening to podcasts. 

Also, if you have an attorney or someone professional I should talk to about this, I would appreciate recommendations! 

[Doug Smith]

Hi @Hannah Forman, Hopefully I can help. I have been a lender for 32 years and own a mortgage company that does both commercial loans, like your 9-plex, and conventional loans, like the one you are going to finance, so I know both sides. 

Let's first talk about the difference between "Recourse" and "Non-Recourse". In a Recourse transaction, like most transactions of this size, the LLC you mentioned will be the borrower while you and your husband will be "Guarantors"...meaning you are personally guarantying the loan. If the LLC doesn't pay, you guys are personally on the hook. In a Non-Recourse transaction, if the LLC doesn't pay, you haven't personally guaranteed. it, so they can't come after you. This personal liability might make a difference later. But here's were it gets a bit tricky.

With an LLC like you are setting up, it might file a separate tax return, but the profit or loss will flow through to your personal return. Any lender worth their salt will flip to your personal return Schedule Es, look for any other entity that is flowing through to your return, and ask for those returns as well from those entities. They are going to see "Interest Expense" from the loan you took out and they can even flip to the return's balance sheet section and see the loan there. Basically, even if the loan doesn't report on your credit report, a decent lender is going to catch it and will likely want to add it to your DTI. If it's "non-recourse", you might get away with having this left off. Since it's private basically to your family, they might want it in there.

Institutional lenders don't really do non-recourse loans of that small of a size. It usually has to be a massive loan to get a non-recourse loan unless it's a small community bank that is willing step out of the norm a bit or a private loan. The only other option, and this is expensive and not necessarily a great option, is to not do this in an LLC or S-Corp that flows through to your returns, but a C-Corp that pays it's own taxes. It it's non-recourse and the income/interest expense doesn't flow through, then it might not show in your DTI. If you have follow up questions, I'm happy to answer. I hope this helped.