Best option for mortgage when buying rental to hold in LLC? (NY)

[Corey Demuth]

I am trying to buy a SFH to rent out. I am running into a problem where residential lenders don't want to let me take title into an LLC (even though I would personally guarantee the loan.)

OK.

So I talked to some commercial lenders, but they are offering me what seem like pretty difficult terms to make a deal work. Mostly 5 year fixed rate loans amortized over 15 years. The payments are too high (going to cut into my profit too much vs a residential 30-yr fixed loan) and on top of that the closing costs are higher and you basically MUST refinance every 5 years due to the balloon payment (which leaves me vulnerable to interest rates going way up, AND means I have to pay some closing costs again every 5 years.)

Is there any other way to do this?? I have heard a few times (including on this site) that people have said there are some places where you CAN get a residential loan when buying property for an LLC.

One person mentioned that she has a special "closer" who can get these deals done, but who charges 2 pts to do them.

A banker told me she knows someone who knows a way to get it done in some cases (and I am waiting to hear back from her.)

Another article I read pointed out that it is not specifically disallowed by Fannie/Freddie as most people think, but that you have to get a bank that understands the fine details of the underwriting rules.

Also, I read a few posts on here where people mentioned getting deals like a 20 year fixed rate business loan (not amortized over 20, just literally 20 year fixed.) Another guy said he gets 25-year fixed commercial loans at 5-6%.

Can anyone tell me either:

-Specific banks that do loans in NY, which will allow me to do a residential loan for a rental property that's going to be held in an LLC

or

-Commercial banks that can offer me better terms than 5yr fixed with 15yr amortization, again they must lend in NY however.

Please note, I am not interested in simply buying under my name then quit-claiming, and/or using land trusts to try to hide the transfer of title; I can't risk the whole DOS clause coming back to bite me.

I appreciate any help or advice you can give me! Thanks!

[Adam Johnson]

Hmm, I don't have any of the trouble that @Steve Vaughan mentions. Steve, I am not trying to sound confrontational, merely taking a different stance.The ONLY property that I own outside of an LLC is my primary residence. I have no insurance challenges, nor do I have borrowing challenges. If I'm not mistaken, the need to file quarterly, is referring to having to make estimated tax payments every quarter. I am not an accountant, but I think that is true for any self-employed person and is based in part on whether the previous year was profitable and in part on whether the current year will be profitable, not whether it is an LLC or not.

With that said, I pay a CPA to do my taxes because I don't have a clue how to due to multiple businesses, numerous properties, and different LLC's with different ownership. Yes, the LLC does add to the complexity of the return, but not to an unbearable degree.

I have not had any insurance company tell me they wouldn't insure due to the property being owned by an LLC. I have never really compared rates for the same property owned by an LLC or by an individual, but I would be very surprised if there is any significant difference with all other factors the same. They are, after all, insuring the risk associated with the PROPERTY, not with the ownership entity.

One primary difference exists with regards to the financing. This is something that I have just accepted already and moved past. Any lender using Fannie/Freddie underwriting is automatically scratched from my list. They won't lend to an LLC and I do not subscribe to any of the "creative" work arounds that you may read about here or elsewhere. As a result, I tend to deal with smaller regional or local banks that lend and hold the mortgage in their own portfolio, they don't sell it on the secondary market. Yes, I pay more. Yes, I have shorter terms generally speaking. And yes, sometimes I have a balloon and/or an adjustment written in. I have accepted this and simply incorporate those costs into my deal analysis to see if I should by a property in the first place.

With a shorter amortization, you also reduce the possibility of future challenges to refi, if that becomes necessary, because you are paying down your equity much faster.  Also, just because there is a balloon, does NOT necessarily mean that you HAVE to refi at that time, though it may.  If you speak directly with a decision maker at a smaller bank, which you likely will when dealing with portfolio products, you will likely learn that in many cases, they will simply rewrite the loan, likely with an interest rate adjustment, and let you keep going provided you have good payment history.  It is difficult for these types of lenders to find enough places to put their money and have it perform well, so if you prove yourself as a stable paying client, they have little reason to call it due.  This MAY, and probably will include a rate adjustment.  Your hedge against this is that since you have a shorter amortization, you will be in a better position to go shopping to other lenders, should you decide it isn't to your advantage to renew the loan.

There will likely be other people that say my approach is flawed. That is all up for interpretation. It works for me, I am in NY, and I own several properties in several LLC's. I don't operate in NYC, I live and work in the "other" NY. :) I don't think that is a big factor, however. It boils down to how you want to operate your business.

It sounds like your plan makes sense and I don't see any obstacles in your way.  You will walk a different path, but that doesn't mean it won't take you where you want to go.

One thing I will say, though, is that running numbers on properties using a 15 or 20 year amortization will make it tougher to find deals that cash flow.  BUT, they will also drive you into deals that are FAR better than deals that will only work using 30-year debt!  You will have to look at more deals to find one that works, but the properties you buy will be better/stronger investments.

I will add that I don't have a different LLC for every property I own. I don't have a magic formula for how many in each name, it is more a matter of your choice.