Do Hard Money Lenders only lend to LLCs?

Question

I’m a new investor trying to get all my ducks in a row in order to purchase my first property. I’m aiming for a BRRRR strategy, so I’ll be starting with a hard money loan and then doing a cash out refinance with a local community bank. The first hard money lender I talked to told me that they only lend to LLCs and not just me as a person. Is this typical? If so, does that mean I’ll have no choice but to use a DSCR loan for my refinance? Is this my best course of action or is there a method that I may not be aware of? Thanks in advance friends!

Chris Seveney · Answer

Bigger issue of LLC vs No LLC is the "new" part. Getting a loan with no experience from a HML is going to be tough and very expensive.

Javier Parra Garcia · Answer

I hope to not learn the hard way but I'm starting a hard money business in AZ and considering that I am a newbie I would love to work work with newer rehabbers! I would feel like a hypocrite if I expected plenty of experience while not having it myself! haha

Brandon Gale · Answer

@Danny P. It depends on the lender, I've talked to HMLs that only lend to LLCs and I've talked to HMLs that lend to individuals as well. Some have different terms for LLCs vs Individuals, some don't. Some require previous RE investing experience, some don't (although lately it seems like most do with the state of the economy). Talk to a bunch of different ones and ask them about their terms. There's a lot of variance between lenders with hard money so definitely shop around.

Givo Aghasi · Answer

@Charles Pawling No, you can close as individual or entity depending on location and lenders guidelines. This is a good reason why working with a mortgage broker can help. Mortgage brokers have specialized knowledge of the mortgage market and can help investors navigate the process of securing financing.

Bud Gaffney · Answer

@Charles Pawling No. they lend to individuals also.

Ned Carey · Answer

@Charles Pawling generally Hard money lenders do require an LLC. This is because they want it clear that this is not a personal loan. The laws regulating business loans are much less restrictive.  Of course all business loans depend on the particular lender so you may find one.           I understand this will require me to use a DSCR loanNo this is not true, however any loan to an LLC will be more restrictive and more expensive than a loan in your own name. This is just one of the costs of doing business.

Zachariah Tuck · Answer

Are you trying to buy a fixer upper?  As for an LLC it’s often stated that you don’t really need one until you have significant assets. I personally prefer to be protected, which slowed my journey, but we all progress at our own pace. 2cents. Unless you’re house hacking the numbers should always pan out before you buy. Outside of acceptable risk then walk away. There are a ton of calculators for this. practice with them and use real numbers from doing real research.

Do your coupon clipping up front you make more money when you buy!!

Any other questions?

Danny P. · Answer

These answers are great and very much appreciated. What makes me nervous about going with the LLC for my first deal is that I understand this will require me to use a DSCR loan for the refi and then I need to be sure that my rental income will cover the DSCR rate that the bank requires (I understand this will be like 1.2-1.4?) If it wasn’t for this requirement, I would be willing to have a lower cash flow at the start and just count on the long term benefits of the investment. Hopefully this makes sense…like I said, I’m new, but I’m studying hard and asking all the questions I can think of now instead of when I’m in the middle of it lol

Randy Rodenhouse · Answer

Most hard money lenders want to do a "business purpose loan" which means not loaning to an individual but to a LLC or S-Corp or C-corp. When my company lends private money that is what we require as well. I am sure there are all kinds of companies out there that have different requirements but most seasoned private lenders require an entity.

Why not put your property in an LLC and then get the funds?  If is beneficial also from the asset protection aspect as well.  Your first LLC could be to simply go to Legal Zoom and setup a flow through LLC (which means from a tax perspective it "flows through" to you personal tax return) and deed the property into the LLC and then get the loan.  It is probably better to get a local asset protection attorney but until you have at least 5 assets to protect this will work just fine.

Zachariah Tuck · Answer

My experience is that Hard money lenders do work with individuals outside of LLC's.  As a third party to most deal, I have seen them lend to both, usually hard money to individual comes with a level of personal trust.  We can all see things happen outside our control and a hard money lender is investing in people.  They need to protect themselves.  Certainly not impossible, but make calls, network, build a portfolio of current success/projects.  And don't be afraid to show it to people.

Do Hard Money Lenders only lend to LLCs?

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