Refinance an investment property purchased with cash thru an LLC

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Refinance an investment property purchased with cash thru an LLC

Bryan K.
Chicago, IL · Member since 2016 · 7 posts · 1 vote

Hi all, 

2 of my business partners and I are set to close on an investment property in Chicago next Friday.  The seller already had an all-cash offer, and it was a great deal, so we looked for a way to beat out the other offer.  As a result, one of my partners arranged for a 4% loan from his mother for the full purchase price, which we used to make an all cash offer.  

The plan is and always has been to do a rate and term refinance through a bank after 1 year.  This seemed simple enough when we intended to purchase the property as tenants in common.  As an additional caveat, our plan is also to eventually do cosmetic renovations in 3-5 years when the rental market has matured a little bit and we can significantly increase rents.  It would be great to be able to do a cash-out refinance after doing the reno.  

Anyway, yesterday, my friend's mother insisted that we purchase the property through an LLC (shes a long time real estate investor and refuses to operate without an LLC). She also insists on having a lien on the property during the 1 year loan. After doing some research, I've come to realize that refinancing through an LLC is both complicated, and will result in a higher rate. I see there being 2 options if we purchase through an LLC:

1) Refi through a portfolio loan at an adjustable rate.  

2) Deed to an individual member of the LLC, refinance at fixed rate financing through conventional loan, then deed back to the LLC.

Does anyone have experience with this? Does it complicate things that there are 3 members in the LLC? I've heard that conventional loans prohibit this type of transfer activity; does a lender have any recourse if you transfer this loan back to the LLC? What impact could private lender's lien have on a future loan (assuming she drops the lien when we refi)?

Obviously the end goal here is to get fixed rate financing at the most competitive rate. I realize the LLC complicates that, but any other advice for how to best proceed would be much appreciated. If you could provide a step-by-step (including the time component i.e. 6 months seasoning), that would be amazing. Thank you!

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Michael Facchini
Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
9y

I recommend a month in advance....IE when the loan process is started, give or take....but we've done it a few days before closing too.  Depends on the scenario.....but either way should be able to get this done without much issue.

That said, you technically should not quit claim back to the LLC after closing. This would be a breach of the Mortgage and the loan could be called due if this info surfaces. Just an FYI. Fannie/Freddie do not allow LLC's. You'd have to ask your accountant and attorney about the benefits of an LLC on this property too. If it's for liability, you might want to research umbrella policies. Not saying to do it one way or another, but worth the conversations and research.

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  • Michael Facchini
    Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
    9y

    Correct, if you want to procure a conventional, agency loan (IE, Fannie/Freddie) at the lowest rates/fees, you'll need to quit claim deed the property from the LLC to the individual borrower(s) name(s). If your mother recorded a Mortgage/Note at closing and there is an actual lien, then you can refinance and payoff that debt.....but if it's cash-out and not paying off a lien, you'll need to wait about 4.5 month to get the process started and then close after the 6th month elapses to meet seasoning requirements.

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  • Bryan K.
    OP
    Chicago, IL · Member since 2016 · 7 posts · 1 vote
    9y

    Thanks, @Michael Facchini.  Can I quitclaim the deed to the individual borrower(s) right before the refi, or does that need to be done months in advance? 

    If we intend to do a cash out refi in 3-5 years, will the process be exactly the same? 

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  • Michael Facchini
    Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
    9y

    I recommend a month in advance....IE when the loan process is started, give or take....but we've done it a few days before closing too.  Depends on the scenario.....but either way should be able to get this done without much issue.

    That said, you technically should not quit claim back to the LLC after closing. This would be a breach of the Mortgage and the loan could be called due if this info surfaces. Just an FYI. Fannie/Freddie do not allow LLC's. You'd have to ask your accountant and attorney about the benefits of an LLC on this property too. If it's for liability, you might want to research umbrella policies. Not saying to do it one way or another, but worth the conversations and research.

    1Reply
  • Bryan K.
    OP
    Chicago, IL · Member since 2016 · 7 posts · 1 vote
    9y

    Lastly, what impact if any, will this structure have on the required loan to value ratio? Will if be higher if we do this through an LLC.

    0Reply
  • Account Closed
    Investor · Dallas, TX · Member since 2016 · 67 posts · 22 votes
    9y
    Originally posted by @Michael Facchini:

    Correct, if you want to procure a conventional, agency loan (IE, Fannie/Freddie) at the lowest rates/fees, you'll need to quit claim deed the property from the LLC to the individual borrower(s) name(s). If your mother recorded a Mortgage/Note at closing and there is an actual lien, then you can refinance and payoff that debt.....but if it's cash-out and not paying off a lien, you'll need to wait about 4.5 month to get the process started and then close after the 6th month elapses to meet seasoning requirements.

     I am a lender as well but still quite new in terms of experience. Have only been in the business 1.5 years.

    How do Investors build a portfolio of units if these restrictions exist? 

    Once you hit the 10 unit or whatever the Fannie/Freddie limit is for mortgaged properties - what are your options?

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  • Michael Facchini
    Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
    9y

    Depends on lender to lender.  We allow up to 15 on some programs, and then have a program for 15+.  But as investors start to get up there, they might look to commercial/blanket financing as the portfolio is large enough to grab the attention and warrants a more customized solution...

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  • George DespotopoulosBusiness Member
    Lender · New York, NY · Member since 2016 · 936 posts · 287 votes
    9y

    Hey, I'm not a tax professional nor in Illinois, but I believe you should be mindful of the imposition of City and State transfer taxes here as well. 

    MoFin Lending4.9152 Reviews
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  • Bryan K.
    OP
    Chicago, IL · Member since 2016 · 7 posts · 1 vote
    9y

    @Michael Facchini Do you have any response to George's comment?   I am aware of the Chicago city transfer tax, but wonder what your experience has been.

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  • Michael Facchini
    Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes
    9y

    You can quit claim from LLC to personal if you're the sole owner...or co-borrowers are 50/50 on LLC and quit claiming as co-borrowers/individuals. No transfer tax. Sometimes have to just pay the water cert, but that is less of an issue now that the Water Dept is in the 21st century.

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    9y
    Originally posted by @Bryan K.:

    Does anyone have experience with this? Does it complicate things that there are 3 members in the LLC? I've heard that conventional loans prohibit this type of transfer activity; does a lender have any recourse if you transfer this loan back to the LLC? What impact could private lender's lien have on a future loan (assuming she drops the lien when we refi)?

    You're going to need to get a few years of financials (~2 to 3) before a bank, using Freddie or Fannie backed loans, will lend to your LLC. You're other option are loans not backed by Freddie or Fannie. Your rates will be higher but it's the price you pay at the beginning.

    Regarding deeding back to the LLC- You could trigger a due on sale clause in your loan documents if the property is deeded back to the LLC.

    Regarding the private lender's lien- It would be paid off when you refinance.

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