Cash purchase with LLC, then buy back with conventional loan?

Question

Hi Bigger Pockets!

I am actively looking for property in the Cincinnati area and as a lifelong Oregonian I have to say I love it here. My plan is to use a 203k or HomeStyle renovation loan to take "depreciated" duplex, triplex or quadplexes and bring them back to current standards for rentals. After the required year, I plan refi out of the reno loan and repeat the process.

I'm finding that with the market as hot as it is, I may need to buy with cash to get a good property for this BRRRR approach. Unfortunately, there is a 6 to 12 month waiting period after purchase before I can use a renovation refinance loan. So, my question is: can I, or a friend, use an LLC to complete a cash purchase on a home, and then have the LLC sell the property to me using a reno loan? The benefit here is I can close rapidly for the initial seller and get them their cash in days or weeks, then take the time required to get estimates, permits etc so I can personally close the reno loan.

There is of course the risk that the LLC will make a poor purchasing decision and pay too much, but aside from that, are there negative tax implications for this? There should be no capital gains for the LLC because the buy and sell price are the same, unless that is somehow prohibited. Would you anticipate any issue from the bank side? If the LLC is operated by myself, or if required by a friend, would that be a problem? If I invested in the LLC or loaned money to the LLC which enabled it to buy property, including the one I end up buying back, would that be a problem?

Of course, the answer is "talk to a tax attorney" which I will certainly do, but I'd love to know the general shape of things before entering that conversation. Is this a great idea or am I ringing alarm bells? Thank you all very much for all the information you share, it's greatly appreciated!

To add my own value here, I learned something interesting I'll share: most renovation loans require owner occupancy for 12 months as part of the contract. Because renovation can take up to 6 months, I was expecting that you'd have an 18 month cycle to find, buy and renovate properties. However, for the purposes of the occupancy clause, occupancy begins the day the loan closes. So even if it takes 6 months to finish the renovation and move in, you can start the paperwork on the next renovation loan on the 366th day after your previous loan closed. I hope that helps someone!

-Will Feetham

Paul Welden · Answer

@Wayne Brooks A couple of issues .....

To the best of my knowledge, the FHA 203k does not require occupancy within 60 days. That is a requirement for the FHA 203(b) loan. (Reference HUD SFH 40001.) & the 12 month occupancy timeclock starts when the loan closes (Reference HUD SFH 4000.1).

@Will Feetham You should be able rinse and repeat the cycle many times. As long as your refi out of the FHA loan and into conventional or something other than FHA, you should be able to get another FHA loan right away. (Reference HUD SFH 4000.1).

However, be careful, because if lenders catch on to your strategy, they could decide to not approve you for FHA loans out of concern for your strategy.

Hope this helps.

Will Feetham · Answer

Update, as long as you can leave the cash you purchased with in the property until you refi in a year, you don't need to season the property at all. This is from my loan officer:

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Neither conventional nor the 203(k) require any seasoning for a reno refi. The 203(k) will require the use of a second complete as is appraisal (the calc is different for a k than it is for a traditional refi in the first 12 months).

In neither case can the borrower recoup cash that was spent to purchase the property with cash.

For the 203(k) refi, the property must be owner occupied during the application process, it cannot be vacant. Since the borrower is living there, that does not appear to be an issue.

Wayne Brooks · Answer

@Will Feetham A couple of issues…..

-you won’t get a 203k loan selling from an llc you are a part of, to yourself. It needs to be an Arms Length transaction.

-a 203k requires occupancy within 60 days, which usually Can be extended but your 12 month Occupancy requirement Starts when you actually occupy it, After the Reno.

If you want the Actual requirements, sit down with an experienced 203k lender.

Will Feetham · Answer

Thank you Wayne!

I'll look into arms length transactions to see if this concept is feasible, I appreciate that information!

On the occupancy, that was the information given to me by a loan originator I spoke to. I was specifically asking about the cycle time and when I could repeat the process. I'll follow up to see if I misunderstood!

Cash purchase with LLC, then buy back with conventional loan?

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