Do Bridge Loans or Private Lending Only Lend to LLC Entities?

Question

Hi Everyone,

I have a property I'm interested in Indianapolis but running into an issue with funding. This one is an off-market deal that is currently tenant occupied rented in a month to month lease. However the current rental rate is about 150-200 lower than the market rental value for the area. The plan is to purchase and raise rental prices gradually and come in to do the rehab once tenant leaves - estimating just about 10-15K in repairs - this should get top rent prices afterwards. This sort of falls into the category of a delayed BRRRR strategy.

I'm looking to get a bridge loan or private lending to fund the initial acquisition. However I was told that they are only able to lend to entities. Is this usually the case for this type of lending? Do I need an LLC formed usually prior to getting funding? I haven't done lending outside of conventional lending so this is all new territory to me! Any thoughts or feedback would be much appreciated!

Eric Johnson · Answer

Bridge funding / fix and flip etc... is usually only business purpose lending and mostly only done in LLC's because the lender doesn't want to get hit with consumer loan regulation guidelines and requirements. They are short term financing options designed for business use.

Eric Johnson · Answer

@Ruchir Kaul

Usually you file a single asset holding LLC in the state where the property is located. The only other time where you would file out state LLCs would be for asset protection purposes. Ie filing in a non charging order state and have that LLC own your single asset deal LLC.

I am not an attorney, but It’s most likely not worth the extra cost of filing in another state and then getting a registration to do business in another state. Makes it more complicated than it needs to be. That’s as far as I go w/ legal don’t bother asking follow ups lol

Ruchir Kaul · Answer

@Jeff S. @Eric Johnson

Thank you for the clarification, that makes a lot of sense, I have actually started the process of getting the LLC started, my lawyer is looking into what makes more sense whether to start one at my home state or at Indiana where I intend to purchase.

@Mike D'Arrigo @Daniel McNulty

Totally agree there - a lipstick job shouldn't really add a whole lot of value traditionally. In this particular case the purchase price is low (about 50K) and homes in similar conditions sold in the 85-100K range in the neighborhood. As far as repairs needed - mostly just paint and countertop replacement.

To your points though the low rent seems odd - doing more research on that front, currently having issues contacting the tenant to have the GC visit to give me a better estimate to make sure we didnt miss anything. Definitely doing more due diligence on my end to make sure it makes sense!

Jeff S. · Answer

In case you want to know why, @Ruchir Kaul …

Due to licensing and other restrictions, virtually all private/hard money lenders can only make business purpose loans.  Loans made for investment are almost always for a business purpose.  Here, TILA, RESPA, and the like, along with the associated license and disclosure requirements, will not apply.

Dodd-Frank (TILA) is clear that loans made to entities are considered business purpose loans. This removes any concern or argument about the type of the loan and is the direction taken by many private/hard money lenders.

On the other hand, per Dodd-Frank (and by most state definitions), loans which are not for personal, household, or family use are also business purpose loans.  These do not require an entity.  That is, while a few states have exceptions, private lenders are not required to loan to an entity and can readily make a loan to you personally, so long as the use of the money if for a business purpose.  Buying an out of state rental certainly qualifies.

You can continue to look for a lender that understands this or you could bite the bullet and form an entity anyway.  Off-topic, but from a liability and asset protection viewpoint, this is probably safer for you.

Paul Locus · Answer

A bridge loan is usually second position product. It would be very difficult to get a bridge loan from a lender without being a business entity (Inc., LLC, etc). It can be done but you would have to call around. Right now, alot of lenders have closed up shop due to the virus and are not even offering 1st position loans which is hurting alot of RE investors and developers.

Daniel McNulty · Answer

@Ruchir Kaul

I would have to agree with @Mike D'Arrigo. In Indy, $150 - $200 below market value is enormous and should be a leading indicator of some kind of surprise. I would tread lightly.

I am happy to refer a solid GC that will take care of you, if needed. The last thing you need is a GC low balling just to get the job.

Good Luck.

Danny McNulty

Financial Advisor

Mike D'Arrigo · Answer

Ruchir, what do you consider fairly light? A little lipstick on a pig won't create much equity if that's your goal.

Ruchir Kaul · Answer

@Mike D'Arrigo

Hey Mike, thanks for the feedback - so it will be varying from lender to lender it seems like, I'm still shopping around but that's what I'm seeing too. As for the rehab required, just based off the pictures sent over total rehab required does seem pretty light. But I am having a GC take a look at it later this week to verify.

Mike D'Arrigo · Answer

@Ruchir Kaul every private lender is different so you'll need to talk to them and see if they require it to be in an LLC. Have you confirmed what needs to be done and if it is only $10-$15K? That would be a pretty light rehab. Generally, when rent is below market rate, it's often due to a long term tenant in place. Rehabs tend to be higher when a property hasn't turned over for some time. Get a good handle on what needs to be done and what the cost will be otherwise you won't be able to pull your money out with a BRRRR.

Do Bridge Loans or Private Lending Only Lend to LLC Entities?

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