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Updated almost 7 years ago on . Most recent reply

User Stats

43
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2
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Jackie F.
  • Rental Property Investor
  • Ft. Lauderdale, FL
2
Votes |
43
Posts

How to establish credit and financing for my Real Estate LLC?

Jackie F.
  • Rental Property Investor
  • Ft. Lauderdale, FL
Posted

Hi BP,

I currently have 4 rental properties with mortgages under my name. I am looking for my next property, but would like to finance it under the name of my LLC. All my LLC has is a credit card. I only have 1 year of tax returns for my LLC, but have over 5 years of personal tax returns with my 4 rentals. So I have rental experience.

I have a regular W-2 job with good income, good credit and no debt besides mortgages.

What is the best way to establish credit for my LLC to make financing easier? As I stated, my LLC has one credit card. How hard is it to obtain reasonable financing terms for a property under my LLC? Do i need another year of tax return? Are terms worse with an LLC than personal investments?

What are the pro's and cons of LLC financing vs personal?

I have heard about small banks offering loans to LLC's, but I want to educate my self first before reaching out to a bank.

Any information would be greatly appreciated.  I really need some guidance.

Most Popular Reply

User Stats

184
Posts
154
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Michael Garofalo
  • Rental Property Investor
  • Washington, DC
154
Votes |
184
Posts
Michael Garofalo
  • Rental Property Investor
  • Washington, DC
Replied

Hi Jackie,

I was in your exact shoes several months ago, and have done a fair amount of research on this topic. For reference, I created an LLC to hold my first investment property, and am planning to do a cash-out refi before May is up for this particular unit.

To answer your question, the easiest way to do it (or at least the way I am doing it) is to take out the loan in the name of the LLC, but attach what's called a "personal guarantee." That means that the bank can still hold you personally liable in the event of default, and will consider your personal income/assets when underwriting the loan. All that being said, you won't be able to do this at a big bank because the amount you'll be borrowing (in the eyes of their commercial department) is insignificant. As such, I'd recommend visiting several local banks and speaking with portfolio managers on the commercial side. Be honest and tell them about your experience, and ask insightful questions surrounding the products they offer. If you have good credentials and can speak intelligently on the matter, they'll be willing to work with you and make the loan.

Pros and Cons of Commercial vs Personal financing? Pro's would be you get to start establishing credit for the LLC, and you get to establish a relationship with a local bank which will certainly help funding future deals for your business. You also get the liability protection that comes with an LLC, in the event your tenant tries to sue you personally.

The cons are simply that the terms are never as favorable when compared to personal financing. You'll never find a 30-year fixed product, and the interest rates will always be higher. A typical commercial loan will probably run you ~1-2% above prime, with a balloon repayment (likely no greater than 10 years), amortized at 20 or 25 years. At the end of the day, I still think it's worth it to go commercial via an LLC to protect yourself in the event of a tenant lawsuit. Umbrella insurance unfortunately isn't all it's cracked up to be.

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