Obtaining loans under a LLC

[Navid A.]

Good Evening BP!

I talked to my lawyer today to finally set up a LLC to add another layer of protection against liability. My concern now is, how difficult is it to obtain a loan from the bank under a LLC versus under my own personal name? My lawyer advised me that it will be harder buying a property under the LLC. He said I could also purchase a property and later transfer the deed over to the LLC with a $150 fee. How do you guys do it? Any tips or suggestions? I don't have deep pockets to fund all my properties with cash and will have to rely on financing in order to expand.

Thanks in advance,

Navid

[Brie Schmidt]

Originally posted by @Navid A.:

Good Evening BP!

I talked to my lawyer today to finally set up a LLC to add another layer of protection against liability. My concern now is, how difficult is it to obtain a loan from the bank under a LLC versus under my own personal name? My lawyer advised me that it will be harder buying a property under the LLC. He said I could also purchase a property and later transfer the deed over to the LLC with a $150 fee. How do you guys do it? Any tips or suggestions? I don't have deep pockets to fund all my properties with cash and will have to rely on financing in order to expand.

Thanks in advance,

Navid

 Residential loans must be lent to a person

Commercial loans must be lent to a business

You can get a residential loan and quit claim it to the LLC like your lawyer said, but it will trigger the "due on sale clause" in your loan, meaning the bank can call it due in 30 days. You can avoid this by transferring it back into your name. Before you go through any of this, I would ask your lawyer what actual liability protection you have since you already "pierced the veil" by buying it in your name, holding the loan in your name, and creating a trail on title from your name to the single member LLC in your name. Any lawyer with a degree from the Bahamas can dissolve any liability protection you think you have by doing it this way.

If you want protection, buy the property in a LLC with a commercial loan or get a good umbrella policy

[Navid A.]

Thank you @Brie Schmidt, appreciate your reply. That makes perfect sense. I just don't know how easily I can obtain a commercial loan with a fairly new LLC. Would this matter to the lender if I'm still putting down 20-25%?

[Jon Holdman]

Commercial loans are not as widely available as conventional residential loans, but there are many banks that do them. Try smaller, local banks. Also try credit unions. Rates may be slightly higher than a conventional loan. Generally the amortization period is going to be shorter and there will be either balloon or ARM terms. You will still probably need to give a personal guarantee. Lenders may also look at "debt coverage ratio" which is the property's NOI divided by the P&I payment and they will have some minimum for this, such as 1.25. Terms on commercial loans will vary by lender, so you want to do a little looking around.

[Brie Schmidt]

Originally posted by @Navid A.:

Thank you @Brie Schmidt, appreciate your reply. That makes perfect sense. I just don't know how easily I can obtain a commercial loan with a fairly new LLC. Would this matter to the lender if I'm still putting down 20-25%?

It won't be impossible. I had 3 properties in my name and then started a LLC and bought 7 in one day and the LLC was a few months old. It took a lot of no's from banks but now they have done 23 loans with me

[Anthony Dooley]

Please be aware that holding a property in an LLC does not provide any actual protection. Maxing out liability insurance and having an umbrella policy provides more protection than an LLC.

[Janelle Scruggs]

@Anthony Dooley Wow thanks for that advice. I havent bought any properties yet but I started an LLC thinking it would protect me. Of course I knew to get insurance but I didnt know that the Insurance alone provided more protection than the LLC.

[Alicia H.]

Great tip @Anthony Dooley

[Anthony Dooley]

@Janelle Scruggs the reason is that if someone hires an attorney to file suit, the attorney will not only name the LLC in the suit. They will go after the LLC, the owner of the LLC, the property manager, and anyone else that they think may be able to pay.

[Samir Shahani]

@Navid A.

My bank asks me to back the loans .. With that setup, the mortgage, insurance, leases, everything is in the name of the LLC w/ me personally as co-signer on the loan in case the business defaults. I don't know if this is even worth setting up. But I know and have heard that if you want to go from personal -> LLC then you have to redo a mortgage (due on sale clause), also some banks won't approve the quit claim deed as a form of transfer; so it probably behooves you to do it this way first if you are ever planning on it.

But at the end of the day @Anthony Dooley is more or less correct; so just forming an LLC and holding properties in that name serves very little protection ...

[Navid A.]

@Anthony Dooley, this caught me by surprise. Everything I have read and listened to thus far is contrary to your statement. Can you explain this in more detail? I was always told that an umbrella policy wasn't enough for asset protection and that an LLC was the way to go. Just have to make sure to avoid owning anything under your own name. 1 LLC for flips, 1 for buy and hold, and 1 for operations.

[Anthony Dooley]

@Navid A. I learned this in a real estate seminar from an attorney on the subject of asset protection. Even if your property is held in an LLC, you own the LLC. So, if you kill someone in a drunk driving accident, get sued, and lose, all of your assets are at risk including your LLCs because they are owned by you. Holding property in an irrevocable trust is safer and holding property inside an LLC that is owned by the trust is better. The amount of layers would be determined by your net worth. If you are broke, then you don't need any of this. Having insurance is the first layer of protection with a maxed out liability policy. You don't need $1million in coverage if your net worth is only $100K. An umbrella policy was designed to protect your assets once you have some. I suggest you talk to an estate planning attorney to see what is best for you at this point in your wealth building, but be knowledgeable and don't get sold products you don't need.

[Account Closed]

Originally posted by @Navid A.:

@Anthony Dooley, this caught me by surprise. Everything I have read and listened to thus far is contrary to your statement. Can you explain this in more detail? I was always told that an umbrella policy wasn't enough for asset protection and that an LLC was the way to go. Just have to make sure to avoid owning anything under your own name. 1 LLC for flips, 1 for buy and hold, and 1 for operations.

Google "piercing the veil"

Example 

https://www.nolo.com/legal-encyclopedia/personal-l...

[Matt H.]

I'm going to disagree a little here. The loan type is determined by the property. With apartments, 1-4 units is a residential loan and 5+ units is a commercial. Then you can have different borrower types, entity or otherwise after that.

We have over 30 residential loans obtained with LLCs on 4-plex's. The loans are not conforming as Fannie/Freddie won't buy them but they are still conventional residential loans. We personally guarantee those loans. The LLC history is of no consequence they used the financials of the guarantor. Our terms are outstanding which is why we go to the trouble and guarantee them. But it's generally true what people say --- it's is harder to get residential loans in an LLC and the terms are often not as good.

Commercial loans they are happy to loan to you with or without LLC, no difference. And in both cases re course and non re course are usually available with recourse being better terms.

If you're just starting I would skip the LLC for residential and just get an umbrella. The costs aren't negligible and you likely don't need the protection. Then as you grow you have the option for residential. For commercial I'd get one.

Just my .02

Matt

[Scott Smith]

@Navid A. the best asset protection is to compartmentalize the each asset using a series LLC and to hide the ownership using a Series LLC. You can integrate that Asset Holding company into your estate plan with a living trust and pour over will. This can be set up once and be good to go for the rest of your life (if done correctly).

@Anthony Dooley I am an Asset Protection attorney as well and what I can tell you is that you got great information that is actually not always true. It depends on a states charging order. If you establish the LLC in Texas (a state that is cheap and strong) then a lawsuit against you would not result in them being able to take your individually wholly owned LLC.