Need help understanding my financing options for first rental property

[Jacob Ramsey]

A partner and I would like to purchase a residential multi-family property this year. Most likely this would be a duplex or triplex. In the areas that we are looking at, the property purchase price would be under 200K. We plan to form an LLC where we have a 50/50 split of the entity. I did not realize that if you wish to purchase a property using an LLC, that you would have to get commercial financing. I'm finding that most commercial lenders are only offering 10-year terms. I think I have the basic understanding that if we were to purchase in our own names, we could get a conventional 30-year. If we were to make the purchase using an LLC, then we would have to find a commercial lender. I like the idea of purchasing through an LLC for the added protection, but it seems like the financials don't make sense on a commercial loan. Are there commercial lenders out there with better terms and rates? I'd love to find a commercial lender with a 30-year term, but it seems like that is hard to find. I keep circling back to the idea that the only option that would work financially is a conventional loan, but I don't like the idea that I would have no protection. What are my options to make this work and pursue a property?

[Troy P.]

Quote from @Jacob Ramsey:

@Ned Carey thanks for your response! It sounds like a DSCR loan is what I am after. What I meant about the financials not making sense was that a 10-year would cause the loan payments to be too high and would therefore ruin the potential cashflow of that property. If I am able to distribute that over a longer time horizon, the property has great cash flow. Thank you for pointing me in the right direction!

That is correct, and I agree with everything Ned has offered, including the analysis of LLCs.  If you go that path, you are not just an investor, but also a businessman.  You have to ensure you are running it as a business and doing everything properly to avoid as much personal exposure as you can.  It would be wise to consult with a few attorneys and get their opinions as well.  There is also your tax strategy to consider.  From my understanding in my own state, if you are partnering with a non-spouse, then you can not file taxes as a disregarded entity.  You would need to file a business tax return which would increase costs and bookkeeping significantly.  Just something else to consider...