Need Financing Advice: Going From 3 Properties to......

[Ross Carpenter]

Hey Guys! 

I have been involved in commercial and residential RE over the past 10 years and have accumulated 4 single family properties (three rental and one primary) between my wife and I (Title: one in my name, two in her name, and one in both). All of the properties have 25%+ equity and mortgages with Quicken Loans (refinanced recently with very favorable rates). 

THE PROBLEM: On each property we purchase, the lender (initially) requires a NEW appraisal for each of the rentals to confirm 25%+ equity AND they demand that we have 6 months of reserves for EACH property in (addition to reserves for the property being acquired and all of the monies required to close). On our last purchase, we were able to get them to re-use one of the recent appraisals for two of the properties and reduce the cash reserves to only two months, but this still represents (what I think is) an unnecessary burden in terms of showing cash-on-hand at close.

I have discussed this with a local lender that I know through a networking group, and he suggested that I transfer the rental properties into an S Corp. According to him, once title to these properties is in an S Corp, we will be able to acquire new rental properties under our name and the lender will not require reserves for these other properties (even though we would both still remain personal guarantors for the rentals). This seems appealing 

I have scoured the forums, and there are lots of discussions about liability and tax shielding, but nobody seems to mention the issue of limiting the requirement for showing cash reserves in their posts. Any advise on how to hold the assets (personally, LLC, SCorp?) or how to finance them (single commercial loan?) would be greatly appreciated!

Income Tax and Liability implications are important, but secondary to goal of freeing up cash to acquire properties quickly. 

Thank You,

Ross

[Chris Mason]

Originally posted by @Ross Carpenter:

Hey Guys! 

I have discussed this with a local lender that I know through a networking group, and he suggested that I transfer the rental properties into an S Corp. According to him, once title to these properties is in an S Corp, we will be able to acquire new rental properties under our name and the lender will not require reserves for these other properties (even though we would both still remain personal guarantors for the rentals). This seems appealing 

This is a great hack, but the trick only works if any outstanding mortgage on a property that you shove into the S corp is NOT in your name as an individual. You have to get the title AND THE DEBT to be in the S corp, and not appear on your credit report. I had an "aha!" moment when I saw this many moons ago, and then an "aww :(" moment when I kept reading and playing devil's advocate with myself.

Please read the following two links carefully for what's going on:

First: https://www.fanniemae.com/content/guide/selling/b3...

That one will lead you to this second link: https://www.fanniemae.com/content/guide/selling/b2...

The SECOND link contains a table where the column on the left where it says "...and the financing is in the name of the S corporation... NO" and right below it "...however, the financing is in the name of the borrower... YES."

Back to the FIRST link, which asks the question "is it subject to PITI reserve requirements?" by sending you to the SECOND link and asking "I dunno, if it's subject to the financed property limitations than it is, but if it isn't subject to that then it isn't subject to any reserve requirement."

So if it counts as a "financed property" then you must have PITI reserves per Fannie. If it does NOT count as a "financed property" then it does NOT require PITI reserves. For it not to count using this particular hack, title AND THE DEBT must be in the name of the S corp.

I really hate to discredit anyone met at a BP networking event, but I suspect someone might be repeating what they heard around the water cooler at work without validating it by fully understanding and thinking about the relevant guidelines.

I could be wrong. I would love to be educated if so, with guidelines and sources cited.