How Does Purchasing a Property with an LLC Work?

Question

Hi all,

I'm a bit confused here because I've heard all sorts of things.

Most books I've read tell me to purchase rental properties with an LLC. I spoke to a mortgage broker who said an LLC can not get a mortgage, it would need to be a commercial loan. Researching the topic further based on that statement, I understand a new LLC with no financial history will struggle to qualify for a mortgage without a personal guarantee (although I also spoke with an attorney who said that shouldn't be a problem as long as the property I am purchasing has income history). Just spoke with another mortgage broker who said the way people do it is: purchase the property under your name, then "quit claim and deed it to the LLC". Apparently they don't do LLC mortgages with personal guarantees. First thing I think of is due on sale clause. Would that be relevant in this situation?

How does it work???

I have browsed around BP but can't seem to find something that addresses this directly.

Andrew Postell · Answer

@Tristan Cottarel there is a lot of confusion on this subject and even confusion on how to explain the answer.  It sounds like you are asking about receiving a residential/conventional mortgage on a 1-4 unit property when that property is owned by the LLC.  If it's anything different than this then please let me know.  I'll try my best to summarize here but this might get lengthy:

• Owning vs. Lending - I want you to think about owning the property and who is responsible for the mortgage as two separate things.  They are mutually exclusive in many cases.  What I mean here is that whatever entity owns the property could be ENTIRELY different than the person signing for the mortgage.  For example, your LLC can own the property...and you could be sign for the loan itself.  So your LLC does not have to own AND be on the loan.  That is not necessary to do.
• Commercial vs. Residential - So can you personally sign for a commercial loan?  Yes!  If you absolutely wanted to, you could have the LLC own the property and have yourself sign for the loan.   However, having the LLC be responsible for the loan isn't that hard if you personally guarantee the loan.  Many lenders can walk you through this.  HOWEVER, a residential loan will have a lower rate on it....so you cash flow better....or maybe it will have a longer term....which also means a lower rate....or maybe the rate is fixed.  Some commercial loans are 20 year, Adjustable rate mortgages.  So when comparing that to a fixed 30 year rate...there is almost no comparison.  The 30 year would be superior since the loan is fixed and spread out further - you reduce your risk (because rate is fixed) and you cash flow better (since loan payment is spread out over a longer period making the payment lower).  Since residential lending allows us to cash flow more, that helps us qualify for other loans in the near future. That's important to a lot of investors especially earlier in their career.  
• Fannie Mae and Freddie Mac - These are the two "government sponsored agencies" that regulate residential loans for investment properties.  They do require you to close in your personal name on both title and with the loan.  Many investors will still use these loans and then change the title to the LLC after closing.
• What are options for conventional lending changing to LLC?  - Let's peel back the curtain here a bit.  The ultimate item that most people are concerned about when doing this is the "due on sale" clause.  Now, most probably have not even read it.  And I don't blame anyone for not reading legal wording of notes but the Fannie/Freddie version does contain 2 important elements in the "due on sale" clause:
• MAY - this is a really important legal word.  The lender "may" call the note due.  And since it's optional...that also means that the lender "MAY NOT" call the note due.  Lenders make a lot of money on mortgages.  Like, A LOT.  They are not going to jeopardize profits by calling your note due.  The other element with "may" is that if a lender were to call your note due, they would have to take your "performing asset" and change it to a "non-performing asset" on their own balance sheet.  If a lender does this to much, that starts to affect their own credit rating!  Thirdly, do you remember when all of those people were protesting banks during the housing crises?  When people were getting foreclosed on because the lenders had them in loan that they couldn't pay?  And that's when they were being foreclosed on for not paying...could you imagine the public backlash if a lender starting foreclosing on people that were paying on time?  Wow.  Forget it, they would be ostracized.  Now, if you don't pay on time, you better believe they will be exercising that clause and it does help them foreclose on you faster.  If you pay on time, they are happy.  So just make sure you pay on time.
• 30 days - the other element to the "due on sale" clause is that the lender MUST provide you AT A MINIMUM of 30 days to rectify the scenario if they enact this clause.  So even if they do ignore all the above items....they still must provide you ample time to fix it.  However, if you are owner financing, this will be pretty challenging since you don't actually OWN the property anymore.  There are still ways around it but you should certainly research owner financing thoroughly and specifically lean on the "lending against a note" concept to know how to solve this if it were to occur.  Lots to know here for sure.
• 
• So can you get a residential loan, and then transfer the deed to your LLC after closing?  Yes, and many people do.  The lenders don't really like to advertise this though.  Hope this helps!
• 
•

• MAY - this is a really important legal word.  The lender "may" call the note due.  And since it's optional...that also means that the lender "MAY NOT" call the note due.  Lenders make a lot of money on mortgages.  Like, A LOT.  They are not going to jeopardize profits by calling your note due.  The other element with "may" is that if a lender were to call your note due, they would have to take your "performing asset" and change it to a "non-performing asset" on their own balance sheet.  If a lender does this to much, that starts to affect their own credit rating!  Thirdly, do you remember when all of those people were protesting banks during the housing crises?  When people were getting foreclosed on because the lenders had them in loan that they couldn't pay?  And that's when they were being foreclosed on for not paying...could you imagine the public backlash if a lender starting foreclosing on people that were paying on time?  Wow.  Forget it, they would be ostracized.  Now, if you don't pay on time, you better believe they will be exercising that clause and it does help them foreclose on you faster.  If you pay on time, they are happy.  So just make sure you pay on time.

• 30 days - the other element to the "due on sale" clause is that the lender MUST provide you AT A MINIMUM of 30 days to rectify the scenario if they enact this clause.  So even if they do ignore all the above items....they still must provide you ample time to fix it.  However, if you are owner financing, this will be pretty challenging since you don't actually OWN the property anymore.  There are still ways around it but you should certainly research owner financing thoroughly and specifically lean on the "lending against a note" concept to know how to solve this if it were to occur.  Lots to know here for sure.
• 
• So can you get a residential loan, and then transfer the deed to your LLC after closing?  Yes, and many people do.  The lenders don't really like to advertise this though.  Hope this helps!
•

Andrew Postell · Answer

@Tristan Cottarel I almost want you to think of OWNING and the LOAN as 2 separate things.  In theory, I could be responsible for paying the loan...and not have any ownership on the property.  The entity who would be responsible for paying the loan is the one who signed for the loan.  That cannot change unless you REFINANCE the loan.  Changing the deed will not change who is responsible for the loan.  I hope that makes more sense.

Andrew Postell · Answer

• @Tristan Cottarel thanks for following up.  Here's the 2 responses you were asking about. 
• 
• "So a residential mortgage cannot be taken out by anLLC, even if it is personal guaranteed. Is that correct?" - that is correct.
• "So rectifying the scenario would be as simple as deeding it back into your name? And this can be done unproblematically in a 30 day window?" - That is also 100% correct.  Just switch it back (if they ever did call it due) and you would be following the language of the note.  It's usually just 1 piece of paper that you file at the county courthouse.  Any title company could help you do it if you wanted to use one.  Very simple.

And sorry about the formatting here. Yikes.

Ned Carey · Answer

The mortgage broker is obviously wrong. The Commercial loan he refers to can be a mortgage. Just because you own an LLC does not  mean you won't also have personally guarantee the loan. That is the norm in small business, almost all small business loans are personally guaranteed. That is in addition to the company being responsible for the loan.

It is harder to get small property loans in an LLC. Generally smaller local banks will be a better bet fro the type of loan you want.

Tristan Cottarel · Answer

@Andrew Postell

Thank you again for the response, and I apologize for the gaps between my own responses.

Follow up question:

If I take out a loan in our name and then deed it to an LLC, am I then still personally responsible for the loan, or does that responsibility get passed on to the LLC? You mentioned this discrepancy between owning the property and being responsible for the loan.

I am asking in regards to the following context:

If I purchase a property in my own name and then deed it to an LLC that has an additional member with ownership, does responsibility for the loan get passed on to them? If so, is there some way to protect this member in the event of a default? From what I understand, most lenders do not view junior liens favorably, and since they hold the first lien it wouldn't help much anyways.

Thank you in advance. I really really appreciate all your responses–huge help!

Nicholas L Vina · Answer

Hi Tristan,

I'm no expert in anything on this overall topic, thus why I'm reading this thread. I can say we've gone through the process of moving from LLC to personal named ownership (in order to get that Fannie loan when we refi in a couple months). The answer I can give is that it seems very county specific in how long they take to process paperwork, but if you understand their timing (a decent title company should know that answer for you) it's not a particularly difficult process. One you should be familiar with if you go through the above scenario since you will have already done it once to have quit-claimed to an LLC.

Best,

Nick Vina

Tristan Cottarel · Answer

So a residential mortgage cannot be taken out by an LLC, even if it is personal guaranteed. Is that correct?

So rectifying the scenario would be as simple as deeding it back into your name? And this can be done unproblematically in a 30 day window?

@Andrew Postell Thanks so much for your response

Salvatore Lentini · Answer

@Tristan Cottarel - I've never had a problem getting my loans in LLC name.  I've purchased dozens of properties in the last few years alone and they are ALL in LLC names.

How Does Purchasing a Property with an LLC Work?

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