Any ways to get around banks not giving loans into LLC's?

Question

Andrew Postell · Answer

@Ryan Hotza thanks for posting this.  This is a very common question and has some different "legs" in the answer so I'll do my best to help break this down some:

• Lending to my LLC VS. Owning Property in my LLC - understand that OWNING your property is different than who is responsible for the note or loan.  In theory, I could be the one responsible for the loan, while you could be on the deed.  That would mean I am supposed to pay the loan and if I don't then my credit would take the hit.  If you owned the property you would be at risk for paying the taxes, lawsuits, etc.  I hope this makes sense.
• Putting my property in an LLC - This is a common strategy that is taught out there.  If this is the strategy you want to go in (please understand I am not advocating that this is the right strategy) then you can very likely do what most investors do....just change the title after closing.  Meaning, the deed (or who owns the property) can be changed AFTER you close.  Some states treat this differently...states like New York and Florida have actual transfer taxes if you do this.  So consult a title company in your state (or the state of the property) to find out if you need to pay anything to do this.  In most states that don't charge a transfer fee it's about $100-$150 for a title company to file 1 piece of paper at the county courthouse to change the deed.  
• Conventional, Conforming Loans vs. Portfolio/Commercial Loans - a "Conventional, Conforming" Loan (Fannie Mae or Freddie Mac...if you recognize those names) will have the best rates and the best terms for us on investment properties.  That helps us cash flow better and helps us qualify for MORE loans later.  If you qualify, especially in the beginning, you want to use these loans when you can.  HOWEVER, the require you to be responsible for the loan personally and for the property to be in your name personally too. And that's where the "transfer of title" need would come into play. A "portfolio/commercial" loan may not have this requirement at all.  Since those loans are governed by the bank itself (as opposed to Fannie/Freddie) the bank gets to make the call.  So they might be able to lend to your LLC and have your LLC on the deed too.  But the rate will likely be very different.  The most common type of loan in this realm is a 20 year, adjustable rate loan.  The payment will be higher and you will cashflow less...but many an investor has used this loan and made it.  Don't be intimidate by the terms of this loan.  I'm just trying to show you what's out there so you can make an educated decision on the matter.
• Using a large, publicly traded bank - this is completely out.  You may not use a large, publicly traded bank as an investor.  What I mean is, you might use one...but you will NOT be getting the best terms on your money with a bank like this.  Every investor that has made it will preach about using smaller, privately held lenders.  I post a list of 7 questions in other places for people to use when interviewing banks.  Some of these might sound familiar (below) but use these to find out which banks are good for us investors:

Questions for Lenders

• When do you start using rental income to help me qualify? (the      answer needs to be immediately)
• How long do you need me to be on title to refinance? (this is      important if you do need a short term loan to purchase then refinance out      - and the answer should be 1 day...very important that it is 1 day on      title is all that is needed to refinance)
• What is my minimum down payment required? (if they only require 15%      down on a single family home that is usually a good sign that you are      working with a flexible lender)
• Can I change title to my LLC?
• Do you sell your mortgages?
• What is your loan minimum?
• Can you explain to me what your reserve requirements are?

Scott Smith · Answer

You can also look into this article that explains how using a Land Trust can avoid the same flags with banks. You would essentially purchase the property in your own name, transfer it into the Land Trust and the place the trust into the LLC. This offers you all the financing options that are available to you in your own name, while still offering yourself the protection of the LLC after the purchase is complete. Another benefit of this is that you can establish the Land Trust with an attorney so that you can keep your personal name off the public record, creating some anonymity from prying eyes.

There are many people who rely on insurance, which is definitely the first step I would recommend anyone take in real estate investing. But insurance only covers one type of liability: accidents. I cut my teeth litigating insurance companies for not paying out big claims after law school, many of those cases were caused by miscommunication and not through intentional wrongdoing. As my personal portfolio has grown over the years, I have introduced additional levels of protection to protect it - I think it is an unnecessary risk to trust all my eggs in one basket.

This is just my personal opinion and not intended to be legal advice. Each person approaches investing differently, and I wish you all the best of luck. I just encourage the investors I meet to do their due diligence.

Tom S. · Answer

@Ryan Hotza  Keep in mind too, run your rental property as a business and address any issues quickly, and you shouldn't have any issues with people suing you.  For example, in my state when purchasing a property the fire marshal will inspect and make recommendations: hard wired smoke detectors, fire rated doors, etc.

The insurance company will inspect it and also make recommendations: railings by the stairs have to be fixed, etc.

Address all of those issues promptly, and you have a great paper trail to say you're running the business properly.

I've owned multiple rentals for 15 years now, had prob 200+ tenants, and not one single lawsuit.  I also carry a $2M umbrella insurance policy too ($500/yr), no LLC, and no issues.

Britt Clark · Answer

Be careful when buying umbrella policies. Some will have language that excludes any “business activities” from being covered. I have a $1million USAA umbrella policy I bought last year (before I even got into real estate investing) just to protect my net worth in case of any lawsuit from daily life. It’s only $224/year. You never know when you might be involved in a bad car accident that might have a lawsuit that goes beyond your routine auto coverage. I noticed a paragraph in the policy that explicitly stated the policy did not cover any ‘business” lawsuits. So, be sure any umbrella policy you buy explicity does cover business activities such as real estate investments.

Mark Creason · Answer

@Ryan Hotza

If I was you, I would consider an umbrella insurance policy to cover perceived additional risk.  We have commercial 1-4 unit loans, but are about a point higher in rate than a Fannie Mae loan.  Let me know if I can help.

Mark

Scott Smith · Answer

You are not voiding benefits by the mortgage being in a different name than the LLC that is on title. We actually recommend getting loans in your personal name because the interest rate is much better. An LLC provides a layer of separation between you and liability for anything that could arise related to the assets or dealings of your LLC. For example, if someone is injured on a rental property that you own, the lawsuit could only come after the assets of your LLC (the rental property). The claimant would not be able to come after you personally or your personal assets. Additionally business debts would remain with the LLC and could not be attached to you personally.  LLCs also have tax advantages, depending on how you file them.

Scott Smith · Answer

The Land Trust would make the LLC the beneficiary, so it will still pass through in much the same way. I often work with clients and their CPAs through the process so everyone is on the same page. Operating agreements are quite specific to specific deals and properties, so I encourage people to approach an attorney to create operating agreements, or at least the first one or two. I actually don’t have any good articles on this topic, at the moment, but since you bring it to my attention I will add that content to my list of articles I would like to write.

Clifford Paul · Answer

Exactly, you have to add each property to the policy and it has to cover your business activities. I use State Farm for business. I cover my personal net worth through USAA with a 2 million dollar umbrella policy.

Clifford Paul · Answer

@Ryan Hotza

Just like @Tom S. I just have a umbrella insurance policy in place. 35 years without a lawsuit.

Philip McCleary · Answer

Most banks will not loan so you have 2 options. 1) just get it in your name and assume a little risk or 2) get a commercial loan into the LLC. There are multiple lenders that can assist, there rates may not be favorable but it’s a option

Any ways to get around banks not giving loans into LLC's?

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