Loan question does this sound right?

Question

My partner and I are in the process of securing financing on an investment property. Purchase price is $48,500. We are putting this property in under our LLC. Lender terms are 25% down, 5 to 5.25%, 5/1 arm. They told us we qualified for a private loan but this becomes a commercial loan and that it is rare to get a long term fixed rate loan. This sounds off to me. Any thoughts? we both have excellent credit and work full time jobs with good income.

Thx

Wayne Brooks · Answer

I think your question is why you can't get a 30 year fixed?  It's because you're buying as an LLC, as apparently you think you need to.  Conventional loans, 30 year fixed, are only available to individuals, not entities.

Richard Bradshaw · Answer

arm is pretty standard for commercial as far as I have seen. For a property of that price, you'll be better off putting it in your own name. 30 yr am, 4%, 20% down

Jeremy T. · Answer

@Ryan Fennick

I'd be careful about planning on putting it into your name and then transferring it into an LLC. Nearly all mortgage contracts have a clause that says something to the effect, "payable in full upon transfer". They approved you and your whole situation and don't want to see any changes to their ability to collect payments. Besides, it's good money after bad to pay that transfer tax.

That said, a mortgage broker also once told me no one they ever knew actually executed the clause. In most cases if the borrower is in good standing, has made payments, has a good relationship you can just let them know your plans and they'll update the records accordingly. Trying to not have them find out is probably not a great plan.

I tend to agree with @Richard Bradshaw about going the private route. You get a much better rate, faster approval and many more banks to choose from. You also pay probably 50% the insurance cost and have more selection of insurers. In most cases, you can add up to 4 rental properties onto your current homeowner's policy which may really make the cost of insurance low.

When you don't go the LLC route, insurance is the next best way to protect your assets. Get a policy form a from a reputable insurer and you're probably good.

My approach is to put every entity in a separate LLC, in Pennsylvania it is only $125 or so to setup an LLC. But it gets complicated fast and you're then paying your tax adviser at the end of the year for more paper work and you have to manage each as a company or you're piercing the "corporate veil". You also pay tons more for insurance, tons more for borrowing costs, etc. It all depends on your long term game and your personal risk tolerance. Probably thousands of posts on this debate, so I'll leave it there - agreeing with Richard while also sharing that I take the lowest risk path.

Jeremy T. · Answer

@Ryan Fennick

They are telling you the truth. Chances are you will either sell or refinance within 5 years anyway. 5-5.25% is in my experience these days the best commercial rate you can get as a newer investor on these smaller deals. Also ask about the amortization period, try to push for 25 years. I doubt they will give you 30 years but sometimes they try and get you for 20 years. I recently financed a commercial loan for the same amount (right around $48k) and the terms were 20% down, 5.25%, 25 Years am.

The "private" part sort of still applied because they'll also be asking you and your partner to sign a personal guarantee. If you have less than two years personal guarantees being required is also part of the deal... probably far more than just two years experience these days with increased regulations etc.

Great to see another real estate investor in Pennsylvania participating on BP!

Charles McCabe · Answer

@Ryan Fennick Harleysville Savings Bank is the kind of portfolio lender @Steve Babiak mentioned.  They did a presentation at a local REI meeting recently and talked about this particular circumstance.  I think you're too far away for them to service directly, but they might be able to point you to a lender in your area.  Talk to Conrad Driver or Kim Licata.

Thanks,

Chaz

Steve Babiak · Answer

Well, you are on the other side of the state, so can't suggest specific lenders to talk to.

And although most lenders will give your LLC loan terms similar to that, there are portfolio lenders out there who are doing longer term loans and even with fixed rates. You will have to make lots of phone calls to find them. You might ask if they will do it if you are willing to pay some upfront points even.

Ryan Fennick · Answer

Agreed.  Thanks for your help!

Ryan Fennick · Answer

So then the question is...is it not just better for one of us to finance the property in our name then transfer the asset to our LLC after the fact and pay the 2% transfer stamp?  also an arm is pretty standard?  thanks for your help

Loan question does this sound right?

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