Refinancing through an LLC

[Kevin Hassold]

So I am currently working towards buying my first BRRR property and have recently found a private money lender willing to set me up a line of credit to purchase and rehab a property. The only catch is that they will only lend to an entity, i.e. LLC. It has come to my attention that banks will not refinance a property through an LLC, which I was not aware of. If I were to form an LLC with two other partners, we buy the property and rehab it through the line of credit, is there a way around this to where we would be able to refinance the property through the LLC or would we have to transfer the ownership to one of our names, refinance, and then transfer the property back to the LLC?

[Andrew Postell]

@Kevin Hassold thanks for posting on this topic.  There are so many misconceptions here and some that are correct but I put together some quick pointers about what you are trying to do and what could be a good strategy as well.  Lots here so I'll try to be brief, so tag me away and ask questions if you need.

1.  The "refinance" piece to the BRRR strategy - With conforming, conventional lending you can only receive a 75% "Loan to Value" (LTV) loan as your max "cash out" amount with a Single Family Home (SFH). So if you are seeking to receive "cash out" from your property you would need to buy and rehab at significantly less than 75%....something like 60%-65% total.

2.  Rate and Term Refinance - If you are not receiving a cash out loan, and just refinancing, then your LTV can be up to 85% with a conforming, conventional loan (Fannie Mae and Freddie Mac).

3. Lending to a LLC - if you are putting the property in an LLC, you can simply just take it out of the LLC before you close on a "Rate and Term" refinance ONLY. You cannot do this if you are seeking a "cash out" loan. You don't need to wait 6 months or anything like this as long as it is just a regular refinance. You could then just transfer the title back to the LLC afterwards.

4. Conventional Rehab - there is a conventional rehab loan where you can just skip the "refinance" piece of the BRRR strategy. This will allow you to save a few thousand on closing costs but these loans need a 30 day closing time so a lot of investors seek a different option that will allow them to close quickly.

5. Bank Overlays - And this is what makes everything SUPER confusing - banks can actually place MORE rules on top of Fannie/Freddie rules.  So even though Fannie/Freddie will allow you to refinance after day 1...the bank could say, "Nah, we need 12 months".  Or maybe they don't even offer the conventional rehab loan.  Or lots of other rules.  And that's why the lending part of investing gets really confusing really quickly.  BUT that's also why most investors say to work with a smaller to mid-sized lender.  Because smaller size lenders don't have overlays....or if they do they have a small amount.  So seek out lenders that know the rules and help you navigate through them.

6. Portfolio Loans - Now, to add another layer here is that all of those rules are for Fannie/Freddie loans. So whatever bank you go to there will be some consistancy in some of the rules. But the other loan type is "portfolio" loans - those are loans that don't come from Fannie/Freddie...they come from the bank's own portfolio of money (thus the name). Some times they might be refered to as commercial loans. But those loan types, since they are governed by the bank themselves, will have drastically different rules depending on the bank you go to. For example, the loan type you are receiving from your one bank that requires an LLC? That is a portfolio product that they have. If you go to the bank next door, their portfolio loan may not have that rule. So it's really important to interview several banks and do exactly what you are doing here which is asking for the best lenders for you.

*WHEW*  And that was the short version!  Tag me if you have more questions.  Hope this helps!