Refinancing a PA property under an LLC

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Refinancing a PA property under an LLC

Maricruz Romero
Accountant · New York, NY · Member since 2018 · 40 posts · 14 votes

Hi BP!

I am in the process of buying my first property in Delaware County PA through the BRRR strategy. I would like to buy it under an LLC which I know is fine but I contacted Citi Bank to ask about a refinance portion and they mentioned they wouldn't refinance if the property is under an LLC. Does this mean I have to refinance with an unconventional lender and do they offer higher interest rates than Citi bank would? Where can I find lenders that would lend for a property owned in an LLC?

Another option would be to buy under my name and then transfer it to an LLC but that would mean incurring double transfer taxes and fees (at the time of the original purchase and then when transferring to an LLC) in order to refinance with a conventional bank like Citi, is this expense worth it?

Additionally, I do have a good credit score (750+) but if I borrow using the LLC would an unconventional look at my personal credit score when determining the interest?

Thanks in advance for looking into my questions!

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
7y

@Maricruz Romero first, you should only be working with smaller lenders as an investor.  Large banks have too many rules and "overlays" to their loans.  Try posting in your state forum here on Bigger Pockets and see what some locals can refer you to some better lenders for this type of thing. Now, to answer your question - You can refinance with a "residential" loan but you'll need to structure it a certain way. But other loans are pretty good too.  Tthere is a lot of confusion on this subject and even confusion on how to explain the answer. 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 yourLLC after closing? Yes, and many people do. The lenders don't really like to advertise this though. Hope this helps!
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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    @Maricruz Romero most banks won't provide a conventional (30yr good fixed rate) to an LLC. There are supposedly a few out there - but I haven't found one. When they mortgage to an LLC, it's a commercial/portfolio loan which means they look at your experience and the rental financials. Plus it'll be at a higher rate and probably a 10/15/20 year balloon.

    I'm a believer that an LLC doesn't help much for a beginner landlord with a few properties. The asset protection probably won't protect you much since the tenants will likely know you. Plus there are other downsides of an LLC, like some states requiring an attorney to file eviction.

    1Reply
  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Maricruz Romero first, you should only be working with smaller lenders as an investor.  Large banks have too many rules and "overlays" to their loans.  Try posting in your state forum here on Bigger Pockets and see what some locals can refer you to some better lenders for this type of thing. Now, to answer your question - You can refinance with a "residential" loan but you'll need to structure it a certain way. But other loans are pretty good too.  Tthere is a lot of confusion on this subject and even confusion on how to explain the answer. 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 yourLLC after closing? Yes, and many people do. The lenders don't really like to advertise this though. Hope this helps!
    2Reply
  • Kevin Grove
    Flipper/Rehabber · Charles Town, WV · Member since 2019 · 42 posts · 43 votes
    7y

    Andrew, where would I go to learn how to "lend against a note"?

    0Reply
  • Maricruz Romero
    OP
    Accountant · New York, NY · Member since 2018 · 40 posts · 14 votes
    7y

    @Andrew Postell thank you for the great overview, that was really helpful!

    0Reply
  • Paul DefnginPro Member
    Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
    7y

    To get conventional rate, buy the property in your name. FNMA will allow you to transfer the title to an LLC, after you purchased, if you deem that to be the best thing for you.

    https://www.fanniemae.com/cont...

    1Reply
  • Brett Miller
    Member since 2019 · 24 posts · 11 votes
    6y

    @Andrew Postell Great and thorough response. Very helpful. 

    I just purchased a BRRRR in Richmond VA and i had the exact same question as i recently opened an LLC too. I'll start looking into options but i may come back to this thread with questions. Thanks!

    0Reply
  • Stephen Glover
    Property Manager · Richmond, VA · Member since 2018 · 204 posts · 297 votes
    6y

    @Brett Miller I've done a handful of BRRRRs in Richmond recently, all under LLC, with commercial financing. If I can help, let me know. Use a small community bank, for sure. Some good ones in Richmond.

    0Reply
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