Can I get a commercial loan on a residential property?

[Kris Wong]

I am trying to get around the 10 mortgage limitation that most banks have these days. My partner and I are buying distressed multifamily (2 - 4 units) with hard money, rehabbing the properties, putting good tenants in place, and then refinancing (not necessarily cash out refi, though would like the option when it makes sense). We are holding the properties.

So my questions are, is it possible to get a commercial loan, so that the note will be in the name of our LLC (and we don't have to mess around with re-titling the property)? Additionally, does the note need to be non-recourse (no personal guarantee) for the note to not show up on our individual credit reports?

We have reached out to several lenders and are having a hard time getting clarity on this.

[Kevin Romines]

@Kris Wong I have talked at length about how to do this in previous posts. Rather then pull up previous posts, let me walk through the details here.

Fannie Mae has a 10 financed property rule, yes that is true, however if you know the way to structure things, you can be in a position to get as many Fannie Mae loans as you may ever want to have. First you must understand Fannie Mae's view on LLC's. Fannie Mae view's any financing of a property in an LLC that you own 25% or more of, as a financed property and it counts in their 10 financed property rule. It doesn't matter if its a non-recourse loan or not? It counts.

However if you open a SUB S or a C Corp. and move some properties over to that entity and then go get commercial or portfolio financing (available through any local community bank or credit union) even if you have to personally guarantee the loan, it doesn't count in the 10 financed property rule., because the loan is in the name of the corporation and its commercial. Pretty cool huh!!!

So what you want to do is hold your properties in your personal name to get Fannie Mae financing on them. As you get close to 10 or are at 10 financed properties, then move 1 or more over to the SUB S  and get commercial / portfolio financing and that thereby opens up 1 or more slots for Fannie Mae financing on your new purchases coming up. You can continue this pattern to financing hundreds of properties or as many as you could ever want. 

Why does everyone want to hold properties in LLC's, well most do it as a level of separation and protection of the personal assets. I agree, protection is critical, but I argue that a well crafted landlord policy with the highest amount of liability coverage, followed up by an appropriately sized umbrella policy is just as good in some cases better protection. I used to be an insurance agent for the major carriers.

The liability policy can and will pay out to the max. liability limits, but it will also pay 100% of all defense costs which no LLC on its own will do. Any competent attorney that is dead set on getting to your personal assets can pierce the vail of the LLC and get to your personal assets. They know how to set up the LLC's, they also know how to unwind one as well. Just mix personal assets and LLC assets even 1 time, and your now vulnerable to having the LLC vail pierced. Besides, you want to have access to the best financing, well that requires you to get Fannie Mae financing in most cases.

My game plan for all that will buy and hold to 10 or more properties is for the hold them personally and then open a SUB S and transfer the properties that make the most sense to transfer (age out the longest financed properties or the properties with the smallest balances) to the Sub S, get comercial / portfolio financing and use the Fannie Mae products to purchase and hold as long as you can. 

Here are the actual guidelines below:

See below from the reference guide for FNMA multiple financed properties. If they own 25% or more of the LLC or partnership then it would count.

Type of Property Ownership to include in Financed Property Count:

 Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property).

Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation; however, the financing is in the name of the borrower.

 Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

 Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the obligor on the mortgage.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower.

 Ownership of a manufactured home and the land on which it is situated that is titled as real property

Type of Property Ownership NOT to include in Financed Property Count:

 Ownership of commercial real estate.

 Ownership of a multifamily property consisting of more than four dwelling units.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation.

 Ownership in a timeshare.

 Ownership of a vacant (residential) lot.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership.

 Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).