Leverage Investors Credit

[Patrick Forelli]

Hello,

I currently make a solid income and own a STR that is doing extremely well (30% COCR). I am looking to scale my business and am leveraging an investor (my parents) to fund my down payment for 5 % interest on a 10 year loan.

The loan will be a conventional investment loan that will require 20% down and about a 8.5% interest rate. 

My biggest issue is that my credit most recently took a hit, dropped 100 points from 740-640. I rented an apartment and the property management company added 6 k in move out charges to repaint the entire interior of the home due to minor marks (didnt give back 4 k security deposit and charged 2 k on top). I attempted to file a small claims case but the local property management address was unservable and I would have needed to travel all the way to arizona to attend court. During this process the late payment got reported to collections and I shortly after completed the payment. However, I did not know that this minor 2 k late collections payment would have a lasting impact on my credit report. It dropped 100 points form 740 to 640 and it has not come back up in 3 months.

My parents are more than happy to take out the loan as they are very financially well off, own a few homes in cash, and have no interest in ever taking out another loan for themselves. However, they are weary of being on the title in the case of a lawsuit for asset protection.

Here is my proposition and I would love to know what the BP community thinks.

We create a LLC between myself and my parents and the LLC goes on the mortgage and the title of the house. This in theory should separate my parents assets from the LLC's assets in the case of a lawsuit. My parents guarantee the loan so it goes on their debt to income ratio and their very high income and over 800 credit score qualify the loan for better terms. (is this how it works or does my low credit hurt this deal as a member of the LLC even if I don't guarantee the loan????????).

Please hold the advice about investing with family members. I understand everyone has their own opinions and preferences but please hold off judgement. My parents have plenty of money and most of it is sitting in low risk investments such as money market accounts getting 4.5% interest. My father's justification is that he has no problem lending 50-80 k to me for a 5 % interest. Why would I not take advantage of this opportunity as opposed to getting charged 10-14% from a hard money lender?

Yes, I understand the risk of the 2nd lein but I am extremely confident I can find a STR for 350 k that will gross 80 k in revenue. Total monthly payment with the 2nd lien will be around 3200-3500/month. In fact I own an STR in the same market at a 350 k purchase price that will exceed 90 k in revenue its first year.

Does anyone have any general advice around the asset protection of an LLC for multiple members as well as how loan financing works around an LLC. Can one member guarantee the loan to leverage their higher credit and income, or does the lowest get taken?